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Why Do Businesses Fail? How You Can Avoid the 8 Biggest Missteps!

Updated on August 25, 2015

You can find plenty of advice as to why businesses fail. According to the Small Business Administration as many as two-thirds of start-up businesses will fail within two years. Approximately half will fail within five years. Makes you wonder why so many businesses are started each year with these kinds of statistics, but these numbers only challenge and not discourage the true entrepreneur.

Some experts say there are only two reasons as to why businesses fail. These reasons are lack of money to keep the business going and lack of entrepreneurial qualities. But in reality, running a business is not simple and neither are the reasons why they fail. You can learn from the experts and avoid the 8 biggest missteps and make success yours! You might be surprised by some of the reasons on the list.

1. Underestimating the Requirements

A major reason why businesses fail is that the owner did not set realistic expectations about expenses and potential sales, the competition, the time commitment required and the skills required.  It is important to set realistic goals, create a viable budget, find adequate capital, do ongoing market research and above all recognize that running a business is a major undertaking that will impact your life and the lives of your family.

2. Lack of Financial Planning

Everything always seems to come down to money doesn’t it? But a major reason businesses fail is that they do not develop realistic start up budgets or make realistic budget adjustments from quarter to quarter or year to year. It takes a certain amount of capital to start a business and to keep it going. Lack of capital leads to debt and debt can kill a business. In addition, you need to have reserve operating money to cover periods when sales or collections are slow. Many a seemingly successful business failed after experiencing just a couple of months of sales downturns.

3. Not Setting Specific Goals

Stating that you want to make money is a goal, but it is not a specific goal. Every business wants to make money. But you need to develop specific goals like “generate $5,000 in net sales within 3 months after start-up” or “increase annual sales by 5%.”

4. Taking Too Much Out of the Business for Personal Reasons

Here is money on the list again! Your business needs to be handled like a business and not as an extension of your home budget. It can be tempting to withdraw cash to pay personal bills whenever cash is needed. But if it’s cash your business needs to continue operations then it won’t be long before the business is in financial trouble.

5. Overextending

It’s exciting owning a business but if you expand too quickly without capital or a logical business plan then it’s easy to get overextended. You have to grow methodically in all areas including in overhead, staffing levels and inventory. In addition, you can’t be all things to all people. Rushing products to the market before you can afford advertising and support systems can start a spiral of financial problems.

6. Poor Time Management

In a small business, time management is essential. Many small business entrepreneurs must handle multiple job functions until the business grows to the point where staff can be added. In the meantime, you can find your life consumed with business activities leaving no time for family or yourself.  And in some cases, important decisions are not made in a timely manner because the owner is always chasing after problems. Time management is a function of planning and both need to be addressed on a routine basis.

7. Poor Customer Service

Providing quality customer service is critical. Entrepreneurs that are busy micromanaging a business are prone to miss serious underlying problems in a business.  These problems include dissatisfied staff, lack of quality control, and even lack of adequate staff training. In the quest for sales, the follow-up service is poorly handled and the customer never returns.

8. Has Business Gaps

This is an important reason why businesses fail. Someone can have a good idea but does not have the experience, knowledge or commitment to run a business. Staring and operating a business without realizing that it takes dedication, long hours of effort, an ability to implement strategic details while never losing sight of the overall goals, and a willingness to adapt to a constantly changing business environment can lead to failure. If you have started a business and discover that you have knowledge gaps in a particular area like finance, marketing or human resource management then you need to fill those gaps quickly through training or by hiring experienced support staff..

Avoid the common missteps and your business can defy the odds and become one of the success stories!

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