The One Reason Businesses Fail or Stagnate

posted in: Blog

Within the first five years, 30% of businesses fail according to Industry Canada.  In the United States, many experts on small business failure agree with Researcher David Birch’s estimate of 50% failing in the first five years and 65% in the first ten years.  This doesn’t include the untold thousands of businesses that are started and don’t reach the Entrepreneur’s expectations.  Could there be one reason why there are some many businesses that fail or stagnate?

Hundreds of articles have been written and studies done on why businesses fail. When you search this topic, you will find lists with the top 10 reasons or the 6 untold reasons or how not to be a business failure. What is interesting is that many of the lists are different and most seem to miss the underlying reason. There are a few that come close to the one reason by saying that it is weak general, financial or marketing management and capabilities that cause business failure. However, most people don’t have all the skills necessary to start and successfully grow a business.

It is only when you read between the lines of these articles and studies that you find that Businesses fail because the Entrepreneur and Management didn’t have the knowledge or wisdom necessary to succeed in all the areas of the business and when they didn’t have that knowledge, they didn’t seek and find knowledgeable help either because they didn’t recognize the need or didn’t want to. The help needed could have come in the form of a Partner, a hired Manager or a Consultant.

To put it succinctly: Businesses fail because Entrepreneurs didn’t have or didn’t obtain the knowledge necessary to succeed.

This is the same reason why many businesses stagnate. They haven’t grown their sales and profits for years with many providing their owners barely enough to get by. The owners of these businesses decide that even though they love running their chosen business, that it is time to close it down. These aren’t considered failures because they didn’t go bankrupt but from the Entrepreneur’s point of view, they likely consider it a failure.

How this one reason fits all other reasons

The following are many of the reasons listed in articles on why businesses fail or become stagnant.  I will show how each one is really just a subset of the one reason and that when addressed properly, failure could have been avoided.

No Vision or Strategic Plan – A vision is a long-term view Entrepreneurs have of the future for the  business and sometimes for the world it operates in. It is really the reason for the business to be. A strategic plan is defining the steps it will take and the allocation of resources to reach its vision. A business without a vision and a strategic plan is like going on a trip without knowing where you want to end up and having no directions on how to get there.  Businesses fail or stagnate when Entrepreneurs don’t develop these, either by using their own strategic planning knowledge or knowledgeable advice, often because they don’t recognize the importance.

Inadequate Funding – Before a house is built, detailed drawings are made and costs are estimated. Without this, the costs won’t be controlled and you may run out of funds before the house is finished. Starting and running a business is much like building a house. It needs to be planned ahead and reasonable estimates need to be made of start-up costs, revenue, expenses and cash flow. Either knowledgeable Management would know this or they would have obtained the expert advice they need.

Poor Location – This could be a physical location for businesses where this matters or it could mean proper web presence. When these matter to your business, it is important to have done the proper research or obtained the proper advice on the ideal location. When you are investing significant time and money, spending extra for research and advice helps to hedge that investment.

Lack Required Innovation – This seems obvious when it comes to high tech products and manufacturing processes, but there are aspects of innovation that many businesses don’t consider. For example, businesses may continue cold calling prospects without realizing that the number of calls that turn into sales is dwindling and haven’t realized that their customers are talking about them on Social Media sites. You may also be spending more time than you should on the administration side of the business when there is software available to save time and get better information. Innovation also means that the Entrepreneur is ‘thinking outside the box’ and is not defining their business in a narrow way. In his book, Strategic Planning: What Every Manager Must Know,  George Steiner claims that if a buggy whip manufacturer in 1910 defined its business as the “transportation starter business”, they might have been able to make the creative leap necessary to move into the automobile business. These are just a few of the ways to look at innovation and how businesses fail or stagnate when Entrepreneurs don’t have the skills or don’t ask for advice on how they need to innovate.

Lack of Adequate Cash Flow – This is how many businesses get themselves into trouble. Without enough cash or financing in place to meet the day-to-day operation of the business or make the necessary investments to propel it to its vision, businesses either stagnate or worse, fail. Now consider why a business doesn’t have enough cash. It may be because of unforeseen circumstances, a down turn in the economy, figuring that financing will be found when it is needed or the Entrepreneur had a large amount of cash to start with and thought it would be enough. Trouble can also arise because businesses don’t have up-to-date records so they can see the state of the cash flow at any time and take the necessary steps before a crisis arises. What this all comes down to is lack of or poor planning either because they didn’t know how and didn’t seek help, or didn’t see the importance. This again, comes back to the one reason for business failure.

Missing Unique Selling Proposition – Many businesses are started by someone that has the technical knowledge about a product or service but don’t think about how they will differentiate themselves from the competition or how they will operate the business. Just because you can make pizza, cut hair or sell cars, doesn’t mean that you can start a successful business that will steer customers from where they go now, to now go to your business.  To do this it takes knowing your target market and implementing a well thought-out Strategic Plan to have a unique selling proposition and communicate it to prospective customers. Not all Entrepreneurs have the ability to do this and thus need to either get individuals involved in the business that do have this ability or to ask for advice.

There are several other reasons given for business failure in other articles. They include: Expanding too Quickly; Ignoring Competition; Poor Business Planning; Lack of Succession Planning; No Network; Lack Contingency Plan; Inefficient Control of Costs; Not Properly Controlling Assets Like Receivables and Inventory; Inadequate Insurance; Picking a Niche that is too small; and Competing Head-to-Head with Industry Leaders. If you examine these in the same way, you will see that that all have the root cause of the Entrepreneur not having or obtaining the knowledge needed to succeed.

Conclusion

Now that you know that there is only one reason for business failure, you can take the steps to avoid it happening to you and your business. Assess your own knowledge and ability to start and operate your business including the strategic, marketing and financial planning.  If you don’t have all the necessary knowledge, either get the knowledge and experience you need or find the right expert that can provide it for you. The wisest and richest man who ever lived, King Solomon, said it best when he wrote “Without counsel purposes are disappointed: but in the multitude of counsellors they are established.” (Proverbs 15:22)