Saturday, July 20, 2024
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14 Common Causes of Business Failure

You don’t need us to tell you that the failure rate for businesses is significant. You’ll have a sense of that just by looking at the number of businesses that open and then quickly close in your own local area. Around 20% of new businesses fail within the first two years, and 50% within the first five years.

There’s no way to completely prevent business failure. When you open a business, you have to accept that it’s a possibility. However, if you’re aware of the common causes of business failure, then you can at least take steps to minimize the risk. In this post, we’ll take a closer look at some of the most common causes of business failure, and run through some tips that’ll help to prevent them from becoming a reality. 

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There’s No Market Need

First up — if there’s no or little market for the goods/services the business is offering, then the risk of failure will be much higher. Even businesses that invent new products and services have a solid understanding that what they’re inventing is needed, even if the public isn’t fully aware of it yet. 

Market demand should be determined during the market research stage of development. In business, as in life, it’s never wise to assume that customers will come; there are a lot of businesses that could have avoided heartache if they’d just researched the market landscape before they got underway!

Underestimating Competition

Even if there is a market demand, it’s important not to underestimate competition. Trying to take some of the customer base of an existing business can be tricky. And sometimes, the success of one business doesn’t mean that another will work; a takeout salad business might work, but that doesn’t mean that a second on the same street would. 

Even established businesses can fail if they underestimate competition. A rival business can take your customers and put you out of business. It’s best to take all competitors seriously and make adjustments if required. Blockbuster might still be around if they’d paid closer attention to Netflix!

Poor Product

A business can have significant financial backing, a great marketing strategy, and do all the other things that can make a business successful. But if they don’t have a great product, then it won’t count for much. Successful businesses are built on repeat business, not one-time customers. And ultimately, if the product isn’t good, then your customers will have little incentive to come back. The bottom line? Make sure your product is quality before you begin selling. It doesn’t have to be perfect, but it should at least be good enough.

No USP

A business doesn’t necessarily need to have something that differentiates them from the crowd, but it helps. Having a USP, unique selling point, can help to attract customers in the first place, but it also makes it more likely that the business will survive lean periods. This is especially the case with trending businesses, where many can pop up in a short period of time. When the bubble bursts and popularity levels plateau, it’ll be the ones that have something unique to offer that’ll make it through. 

Lack of Planning

It’s best to avoid overly planning your business. At some point, it’s best to just launch rather than spend forever trying to tie up every loose end. But equally, it’s the businesses that fail to have a concrete plan that usually ends up in difficulty. For example, most businesses need to have an idea of when and how they’ll scale. Some businesses experience rapid growth, which sounds good, but if it wasn’t part of their plan, then it can actually end up killing the business. Staying in control of your growth is key. 

Cash Flow Problems

Cash flow problems are the leading cause of business failure. If you don’t have enough money to pay your bills, then you can quickly end up in situations that are difficult to recover from. There are things you can do that can improve your cash flow. For instance, offering incentives to customers to ensure that they pay promptly. Invoice factoring or using invoice recovery services can also help.

It’s also recommended to build a nest egg when times are good. Those cash reserves can be what keeps your business afloat when times are tough. 

Personal Problems

Most people assume that business problems always stem from economic or professional issues. But that’s not always the case. Personal problems in the life of the business owner are a big cause of business failure. For example, a business owner who is arrested may face legal and financial pressures that make it difficult for them to run their business. You can’t always prevent personal problems, but you can control how you respond. If you’re arrested, then using a bail bonds service can ensure you can return home as quickly as possible. That’ll help you to prepare for your case and, since bail bond companies are discreet, avoid any negative publicity that may impact your business.

Owner Exhaustion

In some cases, it’s not a specific personal problem that puts the business in jeopardy, but owner exhaustion. It can take significant energy and effort to build and maintain a successful business. In some instances, owners decide that they have to close their business due to fatigue. It’s difficult to say whether this can be classified as ‘failure’ or not, because it’s not really. But it’s probably not the desired outcome. Business owners can prevent burnout by investing in their physical and mental well-being, as well as recognizing when they need to take a break

Inadequate Marketing Strategy

The importance of an effective marketing strategy can’t be understated. This has always been true, but it’s especially true today when the majority of customers use Google to find products. If they can’t find you via search engines, then they won’t find you. It takes a lot of time and effort to put together a strategy that works, and those are two things that business owners usually have in short supply. As such, it’s best to work with a marketing agency, rather than trying to do the job yourself. There are marketing services available at all price points, so even if you’re budget-conscious, there’ll be something available for you. 

Undesirable Location

Sometimes, the product and service can be great, but if the business is in an undesirable location, then it’ll be much more difficult to find success. This is true especially for places that depend on foot traffic, such as coffee shops. In those cases, it can be better to wait until a good, or perfect, location is identified, rather than settling for whatever is available. 

Overly Rigid Approach 

You’ll have a vision for your business. But that doesn’t mean that you should be overly committed to that vision. As customer expectations, demands, and trends change, so should the business. In some cases, a radical overhaul may be required; think of those businesses that started out offering one thing, before pivoting towards something else. Businesses that are overly rigid, and thus unable to shift when required, often have a more likely chance of failure. 

Security Issues

No business owner wants to think that someone would intentionally hurt their business. But the reality is, that cybercrime is on the rise and it’s becoming increasingly damaging to brands. Even a minor security breach can cost tens of thousands of dollars. Plus, the resulting loss in customer trust can make it difficult for businesses to recover. 

Poor-Performing Staff

The business owner can only do so much. It’s up to the team they’ve put in place to deliver the goods. If a business has poor-performing staff or poor leadership, then it’ll be more likely that they run into problems that cause failure. In most cases, this won’t be a single point of failure, but rather systematic problems that eventually cause the business to suffer irreparable damage. 

Failure to Innovate

As we said at the beginning of the article, the failure rate for businesses sits around 50% at the five-year mark. So that makes you wonder: if the business was successful for the first few years, what happened to make it suddenly fail? In most cases, that’s due to a failure to innovate. The business may have been appealing when it first burst onto the scene, but if it didn’t grow and develop, then eventually customers will begin looking elsewhere. As a business, it’s important to adopt a future-first mindset this will ensure that the business is looking forward, and ultimately, that it never falls behind. 

Conclusion

There’s always risk in business. It’s just what business owners sign up for when they get started. It’s also worth remembering that failure isn’t always a bad thing, businesses do run their course, and nothing lasts forever anyway. But if you’re looking to keep your business going for as long as possible, then keeping the common causes of failure in mind will help you to put safeguards in place that keep failure at bay. 

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