Research has long suggested that a significant proportion of businesses fail within their first year of trading. According to the Business Know How website, this trend is improving, but even at a 50% survival rate after five years, failure rates remain high.
For business leaders, understanding why other companies have failed is critical to maintaining growth and profitability. Businesses fail for many different reasons, but, broadly speaking, those failures fall into a number of key areas.
1.No business plan or strategy
All businesses start with an idea. What sets the successful businesses aside from the failures is the way in which those ideas are formulated into a plan. A business plan is a critical tool in establishing and developing a business. It provides the framework around which all decisions can be made, considering all the internal and external factors that may affect the business. Without a plan, success is highly unlikely as the business will lack direction and structure.
All businesses need a strong leader. Leadership problems can manifest in different ways. A common problem is that the business leader has poor leadership skills and is unable to direct the business. Some businesses struggle from having multiple leaders, or a leadership team that is unable to work cohesively toward a common goal. Some businesses simply lack any form of leadership at all, with no clear direction or strategy. It's worth remembering that a single, catastrophic decision can ruin even a relatively successful business. It is no surprise that changes in leadership often have a profound affect on the share price of major businesses.
3.Insufficient capital and cash flow
When it comes down to it, business success is measured in terms of cash flow and profit. Many businesses fail because the cash flow runs dry through bad financial management. Cash flow ensures that you can pay suppliers and employees for the goods and services that you need to supply to customers. This is a surprisingly fragile process, particularly for smaller businesses and startups. It's vital to ensure that you have enough capital to start up a business and to maintain it at a profitable level over the longer term. Too many weak financial assumptions lead to rapid failure.
4.Lack of customer focus
A business relies on its customers. It needs to establish a customer base and then retain and reward it, while constantly looking for ways to attract new customers. Too many businesses take a short-term view to customer complaints, saving a few dollars in the immediate term without realising the long-term effect on loyalty and retention. Many business processes fail to consider the customer impact and too many customer-facing companies have unwieldy, ineffective processes that turn their clients away.
5.Unable to adapt
Even the most profitable of businesses can fail if they are unable to adapt. Businesses must be able to adapt to change and that change can emerge from countless different sources. Legal and regulatory constraints can have a massive impact on your business. Changes in technology and customer aspirations will have similar effects. Competitor activity can impact your operating model overnight. Even political and social change can have rapid, profound effects on your business goals. Your business needs to be able to adapt, looking for new opportunities at all times. Complacency can be one of the deadliest threats to any business.
Understanding the reasons for business failure can provide a valuable insight into trends and events that may shape any other company on the market. Many of the reasons for failure are common sense, but all business leaders should constantly review and refine what they do to mitigate the risk that their companies could go the same way as their failed peers.