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The Untold Reasons Why Businesses Fail

| July 17, 2012 | 15 Comments

Why do these reasons remain untold? Simple. Most of the time, the business owner doesn’t realize that these reasons are what caused their failure, and consultants generally don’t ask the kinds of questions that would identify them.

There have been many articles written on the subject of why businesses fail, and most of them point to the same reasons, such as:

  • Inadequate funding
  • Bad location
  • Lack of a well thought-out business plan
  • Poor execution
  • Bad management
  • Expanding too quickly
  • Insufficient marketing or promotion
  • Inability to adapt to a changing marketplace
  • Failure to keep overhead costs low
  • Underestimating competitors

These reasons are widespread and no doubt cause many businesses to fail. However, the reason for a company’s failure is not always something so obvious. Here are 6 lesser-known reasons why a business might fail. Why do these reasons remain untold? Most of the time, the business owner doesn’t realize that these reasons are what caused their failure, and consultants generally don’t ask the kinds of questions that would identify them.

1) Focusing on Short-Term Profits Rather than Building Long-Term Value

It’s important to be profitable, but NOT when short-term profits come at the expense of the long-term value of the business and the lifetime value of the customer.

In other words, a profitable business opportunity consists of people who have dire wants that are being unmet so much that they will jump to buy your solution (product or service). A profitable business opportunity can be compared to a lake with thousands of starving fish. All you need to do is throw in the bait and it turns into a feeding frenzy.

It’s important to consider the lifetime value of a customer. Repeat business is way more valuable than short-term profits. Saving 20 cents on a smoothie today will cost you big in the long run.

2) Ego Business vs. Business Opportunity

The foundation of a good business is a good business opportunity. As an entrepreneur, you want to fill a need in the marketplace. Unfortunately, many businesses are started solely to fulfill an entrepreneur’s ego (or, to put it less harshly, to satisfy one of the entrepreneur’s interests).

This can often be seen in the restaurant & bar industry, where too many entrepreneurs open shop because it’s a “cool”  thing to do. Such businesses rarely succeed.

The success of a business solely lies in being able to fill an unmet need in the market, unfortunately many entrepreneurs engage in business due to personal and selfish gain controlled by their egos. This also drives us to realize that many entrepreneurs are driven to start a business because their friends/colleagues are doing the same. There is nothing more destructive than to pick a business which you can’t fully embrace or which costs you a lot of money to sustain.

3) Lack of a Business Plan:

Business plans are critical for setting goals and mapping out your plan to achieve those goals. They are also critical in order to raise capital. Whether you are seeking a bank loan, or capital from angel investors, venture capitalists or corporate investors, a formal business plan is simply a requirement.

One of the absolute keys to a successful business plan is to create the right business plan milestones. Doing so is essential to securing investors and making real progress towards achieving your goals

4) Bad feedback & white lies

People like spending time with friends and family.

Unfortunately, when it comes to business, friends and family members don’t always give the best advice. This is especially true at the birth of a business. Nobody wants to be a buzz-kill. No one wants to tell an entrepreneur their idea is bad, or their location stinks, or anything else negative. Most people are conditioned to be supportive of their friends and family regardless of the situation.

Plus, nobody wants to be wrong. Imagine your friend has an idea that you think is terrible. You share your objections, but the friend goes ahead with the idea anyways, and it succeeds. Now you’ll always be the naysayer that never believed in them. Nobody wants to be that person.

That’s why you’ll rarely get honest, objective business advice from friends or family members. And yet, oftentimes friends and family are the first people entrepreneurs turn to for advice.

5) Maybe the owner is just a jerk

There are a lot of great people in the business world, but there are also some jerks. And these jerks sometimes start their own companies.

A jerk, in this case, is someone who a lot of people can’t get along with. Maybe it’s because they’re a super-perfectionist, or they yell a lot, or they demand that everything be done in a certain way, or they constantly complain. Or maybe they’re annoying in some other way.

The key is that nobody — not employees, customers, partners, suppliers, clients, etc. — wants to give 100% for a jerk. Clients and customers will be turned off, and employees will start cutting corners. Most people believe that life is too short, and don’t want to spend their time working with someone they can’t get along with.

6) The entrepreneur never took the full leap

In most new business attempts, the entrepreneur never leaves their day job, or they create a back-up plan, or they have a job lined up in case the new business fails. In these cases, failure is an option, as the entrepreneur has a safety net to fall back on. In cases where failure is NOT an option, and the entrepreneur depends on the new business to provide food, shelter and clothing, the business has a greater chance of succeeding.

Every business can be compared to a baby that needs nurturing and protection from the owner to ensure that it grows and lives. Therefore, concentrating on two different things at the same are most likely to affect the growth of that business.

“Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma – which is living with the results of other people’s thinking. Don’t let the noise of other’s opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.”

(The late Steve Jobs, co-founder of Apple and Pixar)

The writer is a Blogger, Marketer, Speaker and a Social Media Specialist based @KenyanMarketer Read more about him and his company Social Edge Africa

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Category: Startup Advice

  • http://twitter.com/abovepromotions Above Promotions

    Excellent article!

    Ebony Grimsley
    Author, Because You’re Small

  • mbneace1

    Based on my research over a number of years a major reason small entrepreneurs fail after achieving some initial success – lack of scaling, beginning with their mindsets.  Scaling is much more than just getting larger.

  • mbneace1

    Based on my research over a number of years a major reason small entrepreneurs fail after achieving some initial success – lack of scaling, beginning with their mindsets.  Scaling is much more than just getting larger.

  • http://www.facebook.com/profile.php?id=1663907806 Pat Strother

    Barack Obama recently said:  ‘If you’ve got a business – you didn’t build that. Somebody else made that happen.’ Would he agree that individuals are responsible for the failure of their business, just not their success.

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  • http://www.businessplan.co.uk/ PJ Stevens

    It’s not always easy to convince entrepreneurs that they need a business plan. Many fear that it will make them less flexible. In fact a good business plan should allow plenty of flexibility but what it really will do is increase focus and that is one very common reason for business failure with the entrepreneurial mindset.

  • http://www.smartbusinesscashflow.com/ SBCF

    I’m an advocate of Cash Flow Projections. By preparing a cash flow projection you have information to help make decisions in advance of being faced with a possible financial crisis. The economy has been tough these past few years and it’s important to track and understand your cash flow. Check out http://www.smartbusinesscashflow.com for detailed information.

  • Bd13

    Things needed for a successful business:
         1. Honesty
         2. Sincerity
         3. Passion
         4. Drive

  • Bd13

    Things needed for a successful business:
         1. Honesty
         2. Sincerity
         3. Passion
         4. Drive

  • Thirdy Rosales

    Knowing these details should be the first thing you really have to consider after a seemingly failing business than to look for other issues to blame. Doing a (legal) business is all about building TRUST in your clients by considering them as individuals who need something that you may provide, not because of the potential money you can get from them through your services or products (but as always it’s BAU). Informative write up indeed!

  • Thirdy Rosales

    Knowing these details should be the first thing you really have to consider after a seemingly failing business than to look for other issues to blame. Doing a (legal) business is all about building TRUST in your clients by considering them as individuals who need something that you may provide, not because of the potential money you can get from them through your services or products (but as always it’s BAU). Informative write up indeed!

  • Mark Gottfried MBA CPA CGMA

    State
    of The Business Owner 2011 Survey by EMyth & Synotec showed that
    business owners that tracked key metrics at least once a month earned
    60% more and were 80% larger than firms that did not track their
    business metrics. 

    In my experience over 30 years of working with small business owners,  another of the main causes of failure that I have seen is not tracking their key
    performance numbers or not even knowing what numbers they need to be
    tracking. Business owners don’t need to know accounting, but they do
    need to know and track key numbers. That is why I have come up with Rule
    of Thumb Accounting(tm).
    A rule of thumb approach to teaching financial intelligence to small business owners.

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