Research shows that less than 5 out of 10 small businesses survive beyond first 5 years. Any budding entrepreneur planning to invest their time and savings into a new venture would not want to be a part of this sobering statistic.
The primary reason for a business to fail is very simple: Outgoing money is higher than incoming money. Sometimes it is called cash flow, but that is not what it really is. They are just spending it before they have it, and that will not work very long.
Some business owners think they can run several businesses at the same time, thinking that if one is low another will be high. Not so; they will probably both be low because the owner is not focused and using 100% of their skills and effort.
Frequently, a business does not know what business they are in. They think they make a great product or provide an awesome service, but they fail to consider what business their (potential) customer/client thinks they are in, or wants them to be in.
Sometimes a business fails because they were too lax with spending when business was good, and when it gets bad, they don't know what to do, or have no reserves.
Many fail because they had no business being in business in the first place. The owner had neither the skill, talent, willingness to work hard, didn't know luck comes from planning and working, etc.
Here's a simple breakdown of 5 "reasons" small business fail:
1. No Viable Market ....
You have this great idea for service or product which you think will change the industry, but have you stopped to think if there are customers willing to pay for it?
2. Poor Capital Structure and Cash Flow Crunch ....
It is fairly common for business owners to take up too much debt or underestimate capital required to reach cash flow breakeven, causing many promising ventures to shut down prematurely.
3. Lack of Marketing Expertise .....
Your customers won’t buy from you if they don’t know you are around.
4. Poor Management .....
Poor management ranks high on what not to do list of business owner.
5. Out of touch with customers ....
Most small businesses are able to have a personal relationship with customers. This is one advantage that huge corporations do not have. But ... you have to put the effort in to make it happen!
I also think that the top problem really is unrealistic expectations.
Let's expand this a little and add some more meat to the issues:
1. They don't plan or allow enough time to get up and running, and/or don't plan for hardships/unplanned activities. (They have unrealistic objectives, goals and no plan to get there. Aren't prepared for the long hours with little pay in the beginning, etc.)
2. They think they know more than they do. I've seen many folks who make decisions that aren't sound even AFTER consulting with an expert. If you take the time to spend money working with an expert, listen to them and understand why they are saying what they are saying. Otherwise, don't spend the money in the first place.
3. They don't have a sales strategy. It isn't just knowing the audience or having a plan it is knowing how to sell, or hiring the right people that can do it for you. Sales for some may be a numbers game (a game of odds), but the best method is to play with strategy (a game of planning.) Do the research, establish a relationship, build trust, act as a trusted advisor and THEN close the deal. (In that order.)
4. They lack a plan to retain clients/customers and/or grow from client/customer input. Smart companies know it is cheaper to retain a customer than find a new one. Smarter companies learn to grow from customer input. Wise companies know how to build business looking for more creative ways by building on relationships internally with staff, customers and vendors.
5. They don't keep up with best practices in their industry and do not understand benchmarking. Where are they now? Where should they be? How do they plan to get there. How will they measure progress? How will they determine success?
6. They are not aligned as a company. Whether micro or huge, businesses can't be successful if everyone isn't on board. Look to the most successful companies in your industry, what are they doing right, what could you do better. How can you get your business aligned from your janitors to your senior executives? Everyone should have the same mission and all be striving to meet the same goals.
7. They spend too much time whining and worrying and not enough time in the trenches. Running a business isn't for the faint of heart. If you can't stand to see the sight of your own blood it is time to jump ship and get out of business. There may be times where your clients make you frustrated, bills seem to pile up, sales cycles seem to slow, etc. but it important to remember that it is all part of a process. Athletes know that by focusing on the process and not on the distractions is what leads to the best results.
There are so many reasons why businesses fail, I think the question should probably be changed to "What Are The Top 5 Things A Business Should Do To Not Fail". Because no matter what business, what industry, what team and capital, if you don't plan and monitor as the owner/director/manager then things can not be successful.
As parents, we don't simply give them a task to do and expect it to be done, we ask them to clean their rooms or prepare the table for dinner or whatever the task maybe and as parents, we watch them, develop them and grow them through the hours, day, weeks, years, centuries, as a parent we feel it is our responsiblity to support them, develop them and encourage them. Not everyone "makes" a child and has hundreds of thousands of dollars in their bank accounts, so capital is not always the key. Man kids are expensive :)
But the moral here is, if we develop and continually monitor our children and even as they develop in life, we have a goal for them to be a positive person, well respected or well presented or in general simply be a good person and not off the rails, shouldn't our business be "our baby"?