Why Businesses Fail

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Establishing accurate data for the failure rates for small businesses is quite challenging as such information is not gathered cleanly in many countries, there are many ways of interpreting the existing data, and current reports show conflicting evidence. Research from the U.S. Bureau of Labor Statistics has highlighted that 66% of new establishments were still in existence 2 years after their birth, and 44% were still in existence 4 years after their establishment. These figures would appear to be a good approximate for what one might find in other countries, although such figures will obviously vary dependent upon the local economic environment and on industry sector (e.g. restaurant sector has much higher failure rates). While one can continue to debate the actual rate of failure, what is important to observe is that the probability of starting a business and failing are very high. There are broadly three areas within which the reasons for failure occur. These are: (1) Pre-Start-Up Planning; (2) Internal Factors; and (3) External Factors. To be aware of the reasons for failure and to be watchful of these occurring within your business would naturally increase your chances of success.

Before a business gets started it is imperative that one considers the key issues in advance and to develop a plan. A simple analogy would be that if you are taking a journey, you will know your current position, you will decide on your future destination, and then you will map out your route. It is the same with pre-start-up planning. The principal causes of failure resulting from this stage are:

  • No plan developed,
  • Objectives not clearly defined,
  • Lack of focus,
  • Not acknowledging one’s own weaknesses and doing something about them,
  • Poor research of the market,
  • Over optimistic sales expectations,
  • Over optimistic expectation of payment by debtors,
  • Underestimation of initial capital required.

It is frequently suggested by potential entrepreneurs that they have not developed a business plan because there is no need for it with their type of business. Every business needs a plan. It is also suggested that writing a plan is too difficult because of a lack of skill in that area. Again this is an unacceptable excuse because there are many books, workbooks, and software packages available in the marketplace that can be utilized. So, to use an old adage “Failing to plan is planning to fail”.

Typically, entrepreneurs start a business because they have an interest in a particular area and have related technical skills. However, as the business grows the role of the entrepreneur alters and requires a change in skills by the founder. This adjustment requires the entrepreneur to move towards a more managerial role for which they are frequently ill-equipped. As a result, the principal internal factors for failure in a business are:

  • The founder’s inability or unwillingness to change,
  • Lack of management skills, experience and know-how,
  • Not keeping complete and accurate records,
  • Having little focus in activities (attempting to be all things to all people),
  • Underpricing,
  • Underestimating competition,
  • ‘Mousetrap Myopia’ (no longer will the world beat a path to your door for having the best mousetrap – you must get out and sell),
  • Poor marketing,
  • Weak financial control (“happiness is a positive cash flow”),
  • Lack of strategic planning,
  • Inadequate liquidity.

As the business grows, there is a need to move from an ‘ad hoc’ management style to professional management which many entrepreneurs are unable to do. Options are available to prevent this from happening. Such choice includes hiring people with specific areas of expertise, learning to adapt to the new responsibilities and role, or enrolling on a training programme that provides a mentor to assist you in making that change. The company should not be allowed fail because of one’s reluctance to ask for help due to egotism.

The final reasons for failure are due to external factors. The global recession of recent years, rapidly changing technologies, significant changes to customer preferences, and the greater internationalization of trade have brought about new challenges for all types of businesses. The principal external reasons for failure are:

  • Economic recession,
  • Inability to access finance,
  • Rising input costs,
  • Paperwork, regulatory and taxation compliance,
  • Market competition,
  • Bad debts and late payments.

While these challenges are real, they can nevertheless be overcome. It is reasonable to suggest that external factors strongly influence the rate of growth of a firm but that the success or failure of a business primarily occurs because of the mindset and ambition of the entrepreneur. As in any other aspect of life, success in the business world can be a choice and not simply a consequence of fate. While non-achievers complain of the environmental challenges that they face (such as economic conditions or government regulations), achievers overcome these same challenges through a determination to succeed.

Research undertaken in America and in Ireland strongly suggests that the mindset of the owner-manager has a significant bearing on the ability of an enterprise to achieve success, and that generally, Irish owner-mangers do not possess the same positive mental attitude that their American counterparts employ. This trait in Irish owner-managers negatively influences the ability of Irish firms to be successful. Achievers operate in the same markets and face the same challenges as non-achievers, except that achievers have a stronger and more positive mental attitude. Therefore, success is a choice – your choice!

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About the Author:

Professor Thomas M. Cooney (B.Comm, MBA, PhD, MMII, MCIM, FIMCA)

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