Why Most Small Start-Up Businesses Fail – Causes, Remedies, Prevention
Starting a small business can be an exciting, worrying, hectic, costly, but also a rewarding and invigorating exercise if its successful. There are many outstanding successes especially with apps.
When you start a small business there is so much to do. So many things happen all at once. It is so easy to forget the business plan, respond to the signals and events and lose sight of the big picture. You may also fail to monitor stock and sales and other key parameters. It is frightening to contemplate, but the reality is that that most small businesses fail.
- About 30-40% of businesses lose most or all of the money that investors put into the company.
- About 70-80% fail to return the projected return in the business plan.
- About 90% of small businesses fail to achieve the outputs, sales and market share predicted in their business plan.
So clearly failure is the norm. So, what can you do about it? Understanding why businesses fail is a good way to start. Seeing what went wrong, may prevent your start-up business from failing.
This article examines the research results and provides some helpful hints to avoid common mistakes.
Companies and business ventures begin to struggle when they fail to anticipate, avoid, recognize, neutralize or adapt to internal management inadequacies or external pressures that compromise their business plans and threaten their long-term survival. Fundamentally, business failure is caused by a misalignment between how the firm uses its resources, how it is managed and the systems in place to track what's happening in the environment and within the business. Maintaining productivity and output is the key and adapting to changes and things you are monitoring. Management failure means the business can not create or sustain a viable strategic position. Or the start-up business lacks the finances, resources of know-how to drive through the threshold and over the bar labeled "success".
Once a business enters a failure scenario, if no corrective actions are taken, the business tracks downward on a spiral trajectory from which it is hard to recover. Usually the organizational framework fails first (not the inspiration, but the practical boring stuff). Next the financial situation worsens causing a feed-back loop that brings the company crashing down.
Why do Most Start-up Companies and Business Enterprises Fail?
Start-ups often fail because there is a fatal flaw in the business plan. Either the management is not committed, the sales dry up, the resources are inadequate, or the ability to capture market share is found to overly ambitious. Every entrepreneur has a crystal ball that they believe can predict the future, but it has a burnt-in sign saying 'success'.
Entrepreneurs also tend to be single-minded with their strategies and many don't have the ability to adapt or change their plans if the environment changes or their expectations prove to be wrong. Tracking what is happening and adapting in response are they keys. Productivity is also very important. Often the expenditure on resources is out of sync with sales and income, or the production cost are too high. It may be very hard to benefit from bulk price reductions if the market is not there for the bulk quantity of goods.
So in order to help to understand what is required for a start-up business to succeed let's examine why they fail.
There has been a lot of research on why businesses fail which is summarized in the tables and images below.
The five common reasons why businesses fail are shown below.
Five Common Reasons Why Businesses Fail
Firms Impacted by Unforeseen External Events
Firms Serving other Interests
Firms that Fail because of a Failure to Take Timely Action
Firms with deficiencies in strategic management
Firms with deficiencies in business administration
Totally badly-managed firms
As shown below, poor management and inability to adapt, are the major causes of business failure due to the impact of both external and internal processes on deliverables and outcomes. Some of this failure does not occur at the start, but is due to failures by management to change direction and move through the various stages to grow the business.
How Internal and External Factors Impinge on Management Short-Comings
Common Causes of Business Failure
Shown below is a more detailed summary of common causes of business failure that have been listed in various publications.
- Poor performing firms that never succeed due to inadequacies at start-up
- Firms that fail after a rapid expansion
- Firms that fail after a later expansion follows early success
- Firms that fail after an external event that could not be adapted to
- Firms that have not adapted (adequately) to their environment and lack the resilience needed to cope with change. This can be compounded by inadequate resources.
The table below provides additional detail.
Businesses that Fail Due to Faults at Creation
Poor Foundation at Start-up
- Poor ability to analyze the environment and to anticipate its evolution
- Inadequate business plan
- Lack of motivation and commitment
Inadequate Managerial Competence and Lack of Customer Focus
- Good technical competencies
- Motivated entrepreneurs
- Lots of Research and Development
- BUT, Poor managerial competencies (Finance, Accounting, Administration, Lack of control)
- Lack of experience with business management or with the industry
- Inadequate Business Plan
- Unrealistic Expectations
Businesses that Fail due to Growth Related Problems
Overestimation of the future level of activity
- Poor ability to anticipate tile evolution of the future level of activity environment
Lack of Control
- Inability to adapt to change and control it
- Poor managerial competences (operational management, finance, accounting, administration, control)
Businesses that Fail due to Inability to Adapt to Changes in the Environment
- Lack of analysis of the environment and of anticipation of its changes
- Inability of the firm to adapt to the changing environment
- Poor motivation and dynamism of entrepreneur or innovator
- Aging entrepreneur or lack of flexibility
- Inexperience with Business Area
Businesses that Fail Due to Firms Serving Other Interests
- The Entrepreneur has other interests and is not fully committed
- Unethical management of Shareholders
- Financial management to engaged to the needs of one business
Businesses that Fail Due to Fraud
- Lack of adequate financial systems for check for fraudulent activities and to prevent them
Tips for Getting it Right from the Start
Market Research - Poor market research is a major reason for small business failure. People are simply too optimistic. They overestimate the marketing potential of their product or service and the appeal it will generate in the market. One obvious problem is price. If its too expensive people won't buy it especially when you have to create a demand. Detailed market research is essential and you get what you pay for.
Poor Business Planning - Most people do not draft a proper, detailed, comprehensive and well-researched business plan. But you can overdo it. Get help or advice if you lack the know-how. A good business plan defines objectives, how you will measure outcomes. You should address all the detailed operational facets of your business before you embark on it. This should include contingencies, options and work-arounds for the parts of the business that are uncertain. Its tough being honest and realistic about the projections and assumptions you make but this is what is required. Always discuss the plan with several people to check that it is feasible and likely to succeed. Try to include risk assessments and bail-out options in the plan.
Limited Start-up Capital - Of course you will never have enough money, but you need a minimum amount to get to the stage that it is self-supporting. Always make sure you have extra funds set aside to cover the extra costs you may not have included. One of the real frustrations is getting the business up and running but just not having enough funds to get over the final hurdle. The race is almost run but you just can't make it over the last barrier - very frustrating. A good business plan should be designed to develop a practical and realistic forecast of how much money do you need up front and running costs required until the income starts to come in. Productivity tends to fly out the window at the start, but needs to be quickly reined in to ensure the business is profitable.
Team Member Relationships and Roles - Although this is something seldom though of, it is a common reason for business failure, often because of poor commitment or lack of engagement by a crucial member of the team. The innovator or entrepreneur may be at the heart of problems because of their stubbornness or inability to adapt the product of the plan in response to feedback from customers, sellers and the market place. Similarly the financiers may disagree with managers in terms of crucial decisions about how to proceed.
Lack of a five-year plan with measurable targets, milestones, measurable performance and productivity indicators and a clear exit strategy - It is important to have a plan that extends beyond the first year of so. The metrics used to drive and monitor the plan should all be measurable and be easily monitored. This applies to all staff and all aspects of the business. There should be targets you are working towards and various exit strategies if they are not met. The risk of failure needs to be factored in to the plan. Realistically the plan is likely to fail and you need to have early-warning systems in place so you can exit without losing everything.
Other reasons why businesses fail:
- The absence of an entrepreneurial orientation
- Poor sales
- Over-investment in fixed assets
- Poor inventory management
- Poor understanding of relevant regulations and laws that must be complied with
- Poor competitor analysis
- Copyrights and Patents
- Inadequate market research
- Poor geographic location or changes in the area's popularity
- Inadequate advertising
- Health and Safety Issues
- Poor marketing
- Inadequate working capital
- Lack of management skills and business experience
© 2012 Dr. John Anderson