7 Reasons Why Most Businesses Fail

business event with participants

Thousands of businesses fail every year, and the reasons for this tend to be fairly common, consistent and avoidable.

The reasons can be easily addressed and all it takes is some focus and effort to address the issues, for business owners to learn new tricks, and to involve others in the business to help with the challenges and opportunities that arise.

The following matters are some of the primary reasons that we have observed over many years, that can be the cause of failure in business.

1. Lack of Market Demand

What can sometimes occur in business is that business owners launch products or services that they like, that they would buy and are good at delivering and value. A consequence of this is believing the market needs said product or service. What the market needs, wants and values is a completely different thing. Businesses will fail if they don’t know what their target audience needs, or if they don’t make it their business to deliver to that need. This critical role i.e. understanding the market is resolved by surveys, conversations, and conducting small tests in the market. No business should proceed with anything new without taking the temperature of their clients and their market to determine whether they have a need for what that business produces or delivers.

 

2. Poor Financial Management

Many business owners, especially small business owners, don’t really manage the finances of their businesses. Instead they tend to manage the cash in the business by looking at their bank accounts and making sure they have enough money and an over reliance on credit cards to the benefit of the banks. Many don’t understand the cash flow cycle in the business. Many don’t put aside provisionally for GST, for withholding tax, for super, for their staff, and often make spending decisions without truly understanding how little profit they’re generating, leading to cash flow problems. Many don’t understand where the profit centres are in a business and what it really costs to run the business. Understanding the P&L informs almost every decision in a business in terms of how the business is run, what products and services are delivered, and the depth and quality to which everything is done. Not having your eye on the finances will eventually bring the business down.

 

 

3. Lack of Effective Marketing

We live in a hyper competitive business environment, where there are many alternatives for every product and service and where most market sectors are crowded making it hard to stand out. Finding out where your target customers or clients live, what they read, how they consume information, and then making sure you’re visible to them is what effective marketing strategy is all about. Making them aware of your products and services so that they can take action is a constant focus for every business owner. Knowing that there will be highs and lows, and times where you won’t have to do as much marketing or when things are just running off the shelves really easily however, despite this marketing never stops. Never stop researching and testing different marketing methods so as to continually test what is effective. For most businesses, the market changes very fast so what worked today might not work tomorrow. You’ve got to be testing new things all the time. Investing in marketing and investing in making sure your target client is aware of your brand and understands your offering is a key factor in all successful businesses.

 

4. Inadequate Planning and Strategy

Many of the successful businesses that we work with, have not written a formal business plan before they start but they always have some good plans and strategies that they can articulate and that they’re continually revisiting. We see it time and time again. Business owners get caught up in delivering the products and services, and doing whatever it is that the business needs them to do. However it is easy to get lost in the weeds operating this way; it becomes easy to lose strategic focus and context. When you’re digging the trench, it’s very hard to work out where you’re going, but sometimes you need to step out of the trench to see where you’re going. Again, because markets are changing so fast, technology and regulation is also changing. It’s essential to revisit your strategy all the time as planning is something that’s vitally important for all size businesses, regardless of how many people they have. Whatever assumptions are informing your strategy they need to be tested regularly as well.

 

5. Failure to Adapt to Changing Market Conditions

We recently spoke to a CEO of an awards program which is designed to recognize innovative behaviours and activity in a business. He claimed that in Australia’s current environment business is so tough that every business that’s still operating is innovative in some way. The market is changing all the time. People will want different things, and it’s very hard to predict what they’ll want. However, your ability to adapt will dictate whether your business will succeed in the long term or not. Approximately half of the companies on the Australian Stock Exchange at the moment were not there 20 years ago, moreover half of the companies that were there 20 years ago are not there anymore. They’ve disappeared because of their inability to change and adapt to new market conditions. There’s a misconception that small businesses are nimble and large businesses are slow, slow to change and slow to adapt. In Australia, that’s not the case. Large businesses can be very nimble. They have the resources to do research and development, and have the resources to change. There are some incumbents that because of legacy issues, cannot change, and so those businesses are ripe for disruption by new entrants. The ability to adapt and change to the market is something every business needs to be able to do in practice and in mindset to survive.

 

6. Underestimating the Importance of Customer Service

How your client consumes your product or service, what they do with it, how they feel about the product, how it feels to experience it, and how it feels to tell other people about it are all things that every business owner needs to know. The day you start taking your clients for granted and not focusing on customer service is the day where your business starts its trajectory towards ending. Customer service is also a great area of opportunity in Australia because generally the levels of customer service are so poor in Australia as we tend to accept bad service. It is vital to focus on customer service in order for your business to survive.

 

7. Overreliance on a Single Revenue Stream

Many businesses, particularly businesses that make products, that have a concentration of its revenue in a small number of clients, a small number of service lines or a single product, are in a very risky situation. An example is when China closed down its markets overnight to Australian wine, barley and seafood those revenue streams came to an end. Every business that wants to not only survive but also thrive, ideally needs a family of products and services. Ideally, it’s best to have some pre-products that are easy to buy, easy to digest, are cheap, and get clients involved, and then you have your core products. These core things are the products & services you do really well, and then once your clients have already bought a few things from you, it’s best to think about what they need post product. When they know your brand, they may be keen to go again. Because they know your brand, they know your service, they like what you’re doing, there is an opportunity for you to extend that as much as possible. The lifetime value of every client represents a huge opportunity that is ignored and leads to business failure.

The Power of a Business Network

The Power of a Business Network

There is this general idea that small businesses compete with bigger businesses. This is not the case in Australia. Small businesses compete with other small businesses, and it is this attitude that stops collaboration. Everybody wants their own tractor even if they cannot afford one and even though they would be better served by sharing one with their peers [that could be competitors].

The beauty of having a broad and long-standing relationship with other business leaders is a great way to address all of the challenges that we mentioned above. If you’re in a business network, you will be talking to other business owners, and clients. It’s almost impossible not to get feedback about your business and about what’s happening in the future. You can discuss market changes and areas of opportunity, and you can learn about new products and services, AI, and other marketing methods.

All of the challenges and threats that are mentioned above can all be dealt with by having or being part of a strong business network. You can also double down on people, that people can actually help you resolve some of these challenges around marketing, around developing new products and services, and the value of the lifelong business relationship can be experienced in multiple ways. Everything from getting new customers, getting market insights, getting feedback on how you do things, getting access to investors, access to growth capital, access to additional team members and directors, and even testing your assumptions, can be accessed from a support business network.

Conclusion

The key reasons why most businesses fail is that they don’t manage their finances well, including Inadequate cash flow management. They don’t have a laser focus on the client in terms of what the client needs and customer service, they’re often undercapitalized, don’t understand the profits and losses, and are fixed and inflexible in terms of their mindset and attitudes. All of these things contribute to the high failure rate that we see in many businesses. All of these issues can be addressed by talking to other business owners, regularly meeting with successful business owners in order to understand and observe what they do, learning from others, and learning from the people who are successfully dealing with all of these issues. This openness is a two way street, it’s not only receiving, it’s also about giving & contributing .

Being part of a business network like HUBB goes a very long way to reducing the risk of business failure, thereby ensuring business success.