Why Do Most Businesses Fail

Why Do Most Businesses Fail

Are you thinking about starting your own business but hesitant because you have heard most businesses fail? You are not alone, truth be known most people would rather work for themselves but never venture out into the wild world of business on their own in fear of failure.  The fact is that 90% of businesses fail within the first 2 years. It is a scary number to get your head around. However, there are 5 key reasons why most businesses fail. If you make sure you don’t make these mistakes then you are more than half way there.

Lessons From Failed Businesses
5 Reasons Why Most Businesses Fail:

We speak to a lot of business owners and have seen some really well run companies, and some not so well run companies. The top 5 reasons why most businesses fail are:.

  1. Lack of a documented strategy and vision
  2. Poor leadership from business owners or management
  3. Not producing accurate financial information on a monthly basis
  4. Too focussed on winning new business at any cost
  5. No access to free cash flow to fund business growth

Dive in below where we talk you through each of the 5 pitfalls listed above in more detail so you don’t make the same mistake. If you need a hand in setting up your business do not hesitate to reach out!

Lack Of A Documented Strategy and Vision

Having a documented strategy and vision for your company will keep you in check. You will refer to it all the time and ensure that all decisions being made are in line with the strategic direction of the business.

It also forces you to think about a number of things important to the success of your business including an analysis of the industry or segment, your go to market approach, the competitor landscape and some of the key risks you will need to manage.

Businesses which fail will either have or a combination of the following: no defined strategy, have deviated from the strategy over time, miscalculated the size of potential market or not understood the competitive landscape.

Documenting your strategic direction and company vision is critical to your success. Download a basic template for a company strategy and vision here.

Poor Leadership From Business Owners Or Management

Imagine you have your own business and decide to hire a sales manager and warehouse operator because you no longer have the time to do these tasks yourself. After the interview and meeting them on their first day you show them how to use the systems and follow processes but them leave them to it after a few days because you are busy focussing on other areas of the business.

The sales manager then starts to bring in new business but they are the wrong type of customers for your business. The warehouse operator is too focussed on getting orders out on time and not ensuring all stock is located properly once received from suppliers. Without providing adequate leadership and direction to staff, using the examples above you could very quickly end up with lots of unprofitable customers and warehouse staff costs blowing out because they can’t find stock in a timely manner.

Like children, employees need a good leader to help steer the ship in the right direction and instil focus on things that matter. Good leaders listen to their employees and make sure they feel supported, giving them a voice and empowering them to take accountability and make changes where required.

Businesses with poor leadership often have high staff turnover, lack a consistent approach and generally we find their expenses on a per unit or process basis are higher than in well run lead businesses.

Not Producing Accurate Financial Information On A Monthly Basis

Advances in technology over the last 10 years have made it a lot easier for small business owners to get access to accurate information on the financial health of their business quickly and relatively cheaply. Cloud Accounting and Bookkeeping Software can produce monthly Balance Sheet and P&L reports from your smart phone.

If we were to give you one piece of advice from the beginning of your journey into business it would be to make sure you keep track of your business financial from day 1 using purpose built accounting software. It will enable you to set up a General Ledger, link your business bank account direct to the system, run payroll and advise who owes you money and when suppliers need to be paid. This is critical to keeping your business afloat and enables you to make decisions quickly.

Almost every business we speak with which is struggling to have to shut down do not have the either the discipline or skills required to produce a set of reconciled business accounts each month and as a result have not been able to spot concerning trends in their business and address them before it was too late.

If you need help in setting up Bookkeeping Software and/or producing timely monthly financial accounts them please book a free consultation with us here. We are experts in this field.

Too Focused On Winning New Business At Any Cost

Growth growth growth! But at what cost? It is all well and good to acquire customers to help increase your revenue but you need to be mindful of what your customer acquisition cost (CAC) is and the average lifetime value of each customer (CLT). If you don’t know the answer to these two questions then you might be in a bit of a pickle.

Businesses are far better off having 10 good customers than 100 shitty ones. It’s also cheaper to upsell and provide additional services to existing customers than try win over ones.

Successful business keep their customers for the long term, provide them with an exceptional service and strike a balance between growth via new customers vs keeping their existing customers happy and understanding what they need.

No Access To Free Cashflow To Fund Business Growth

Cash is king. No one will argue with us here. The bottom line (literally) is that of you don’t have enough cash to pay your suppliers, staff and tax obligations then your business is done.

There is a number of ways businesses can improve their cash flow. They can access a From financing via bank overdrafts to assist with working capital, to loans (debt) and raising capital from investors (equity). Operationally they can look to sell products with a higher margin, increase their revenue from the same cost base through process efficiencies (or reduce their costs via the same). Another way is to look at your business model and see if customers can pay in advance. You might think that sounds crazy but a lot of successful businesses do this.

Most businesses we look at often don’t have a good handle on their cash flow and are always having to spend a lot of time managing it. If you fix the core issues your cash flow issues will go away and you can get back to focussing on servicing your customers, being a good leader and making intelligent business decisions to help your business meets its strategic objective and grow