By Todd Ballowe Published on 12-08-08
Ten Common Causes of Business Failure

Failure is a topic most of us would rather avoid. But ignoring obvious (and subtle) warning signs of business trouble is a surefire way to end up on the wrong side of the business survival statistics.

What is the business survival rate? Statistically, roughly 66 percent of new businesses survive two years or more, 50 percent survive four years or more, and 40 percent survive six years or more, according to the study “Redefining Small Business Success” by the U.S. Small Business Administration. Further, companies that have employees (instead of one-man shops), college-educated owners, and those that have good financing tend to survive longer. Also supported by the numbers in the study, manufacturers overall have a better chance of staying alive compared to service and retail firms.

With this information as a backdrop, I’ve compiled a list of 10 causes of failure from personal experience and informal discussions with local business owners. Hopefully, we can learn what not to do and increase our odds of survival!

  1. Failure to understand your market, your customers, and your customers’ buying habits. Two easy questions: Who are your customers? And why do they spend their money with you? You should be able to clearly answer in one or two sentences. Customers are the only people that put money in your account. Without them, you will not survive.
  2. Choosing a business that isn’t very profitable. Even though you generate lots of activity, the profits never materialize to the extent necessary to sustain an on-going company. We all learned the dot-com (obvious) lesson that to survive, you must have positive cash flow. It takes more than a good idea and passion to stay in business.
  3. Failure to understand and communicate what you are selling. You must clearly define your value proposition. What do you do that can help or benefit me? Once you understand it, ask yourself if you are communicating it effectively. Does your market connect with what you are saying?
  4. Inadequate financing. Cash is king. If you don’t have enough cash to carry you through the sales cycles and downward trends, your prospects for success are not good. When businesses go looking for lenders to provide that cash, they quickly find that funding sources are finicky and difficult to please.
  5. Failure to anticipate or react to competition, technology, or other changes in the marketplace. It is dangerous to assume that what you have done in the past will always work. Challenge the factors that led to your success. Do you still do things the same way despite new market demands and changing times? What is your competition doing differently? What new technology is available? Those who fail to do this end up obsolete.
  6. Overdependence on a single customer. Pay attention to your revenue sources. If you have a customer that is providing a majority of your income, ask yourself what would happen if they left or went out of business. Where would you be? Whenever you have one customer so big that losing them would mean closing up shop, watch out. Having a large base of small customers is a safer beat.
  7. Failure to define your product/service offering. Trying to do everything for everyone is a sure road to failure. Spreading yourself too thin diminishes quality. The market pays excellent rewards for excellent results. Excellent results come from doing what you do and doing it well over and over again.
  8. Keeping your house in order. Slow and steady wins every time. It’s hard to believe that too much business can destroy you, but the textbooks are full of case studies. To serve your customers well you have to focus on quality, delivery, follow-thru, and follow-up. How do you feel when your suppliers say they are “slammed” all the time? Like you are inconveniencing them? Don’t treat your customers in the same manner. Going after all the business you can get drains your cash and actually reduces overall profitability. When you go after it all, you usually become less selective about customers and products, both of which drain profits from your company.
  9. Poor management. Management of a business encompasses a number of activities: planning, organizing, controlling, directing and communicating. The cardinal rule of small business management is to know exactly where you stand at all times. A common problem faced by successful companies is growing beyond management resources or skills.
  10. No planning. If you don’t know where you are going, you will never get there. No clear picture of success will lead to status quo or worse. To grow and be successful you have to actively work on your business. As the saying goes, failing to plan is planning to fail.

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