Why businesses fail and how you can protect yourself

In today’s economic environment we see a shocking amount of business close their doors, or resorting to downsizing by retrenching a large amount of staff to stay afloat. It does not necessarily mean these businesses do not have great products or services on offer. Surviving in the current markets and economic environment requires a smart approach, yet this is severely underestimated.

This article will focus on why businesses fail and what measures you can put into place to keep your doors open. Some aspects that will discussed are very simple but often overlooked, so pay close attention not to miss out on valuable information.

Why businesses fail so frequently?

The short answer is that a proper plan was not put into place, or not properly executed. The detailed answer has much more detail; something that you might find easy to relate to.

When starting a business, the excitement of selling your products and services might be so strong that you do not go through the entire planning cycle. A planning cycle includes vital parts such as a corporate identity, a value proposition, a financial plan / budget, a marketing plan and getting the right people on your team to name but a few. The easy part is to talk about it… It gets more difficult to put it on paper and even more so to implement it into your business. Since we live in a society where “instant success” has become such a famed phenomenon, many people try to take the shortcut to success and quickly face the doom of business collapse since the foundations were never properly laid down.

With any business there is no quick way to success and keeping it sustainable. While some of these business might last longer than others, something will eventually give in. You have to take time to cover all aspects needed to set up your business. So let us have a look between a successful business setup, and also why your business might be at risk of failing.

Doing business the wrong way – and how to do it right

As mentioned above, we will take a look at some of the most important aspects of your business setup and compare a healthy business model against that which is often found in failing businesses. To make it easier to understand, I am placing each section in a comparative table.

Why businesses fail and how you can protect yourself

1. You started a business for the right reasons

SUCCEED:

You are passionate about your product or service and have done extensive research that it will fulfil a need in the market. You believe in what you offer and you are willing to put in hard work to reap the benefit over a period of time, as long as it makes a difference.

FAIL:

You are in it for the money and easy income. Most probably not an original product or service. You are aware it is an acceptable product but do not have the strong passion to put in very hard work. Want to reap immediate financial benefit.

2. You have a comprehensive business plan

SUCCEED:

You have a detailed description of the business, a mission and vision, have a list of potential problems and solutions and you have done a thorough competitor analysis to understand what you need to do the ensure success. All above are implemented into your business

FAIL:

You might have a good business plan, but you do not implement it successfully. In most cases, your business plan however is not well-developed and the knowledge of what exactly your competition offers are lacking.

3. You know how to manage a business properly

SUCCEED:

You have in-depth knowledge of how to manage a business OR you make use of a business advisor to help you manage your business until you know how to handle all the ropes. You also monitor your business closely to understand where things are going smoothly and to identify possible issues as quickly as possible to solve them. If you have staff, you ensure to create a positive working atmosphere where they can grow and excel on the job.

FAIL:

You do not have sufficient knowledge and experience to run a business and decide to “wing it” until you master it. You get so busy and caught up that you forget to monitor your business and end up being overwhelmed, which leads to poor decisions and a negative environment for your staff to work in.

Why businesses fail and how you can protect yourself

4. You have a good financial plan and sufficient business capital

SUCCEED:

With your business plan and researching your products and the market, you developed a clear understanding of the funding required to start the business and keep it running until it produces good returns. You know that your business will take some time to become profitable. You have money in place for staff wages separately from starting capital. You have measures in place that minimises spending and eliminates unnecessary expenditure.

FAIL:

You have done some planning and think you have enough money in place to comfortably make the business work. You do not keep good record of your expenditures or measure business growth accurately. Salaries are paid from your running account right away. You are shocked and surprised to find a shortage of capital all of a sudden, become overwhelmed and make bad decisions such as taking out additional loans the business cannot afford to repay.

 5. You have a strong marketing presence

SUCCEED:

You know your brand and thoroughly understand your value proposition. You have a proper website and online presence in order to be found online. You have an innovative marketing message that makes current and potential customers related to your brand, and generates brand loyalty.

FAIL:

You do not allocate sufficient funds for marketing and view it as an unnecessary expense – particularly a website. You miss out on creating awareness of your business and wonder why people do not contact you or frequent you for your products or services.

 6. You have proper business systems / software in place

SUCCEED:

Keeping track of your business processes and finances is essential to any business. You ensure that you have the correct systems and software in place to run your business effectively. Not only do you comply with the taxman, but you can analyse business reports from the software to monitor business growth and identify potential issues easily.

FAIL:

You have business software but it is not used properly, or in most cases you do not have sufficient software at all. You struggle to keep track of your finances and other business systems, leading to overspending or unnecessary loss of income. Reports on your business are not important or done manually, wasting time and lacking depth.

 7. You adapt your business to market changes

SUCCEED:

You identify a change in the markets and adapt your strategy with smart marketing OR by adapting your product to meet the changing needs of your customers. You embrace and accept that change cannot be avoided and ensure that your value proposition stays relevant and attractive.

FAIL:

You might know that the markets are changing but do not see the need to change anything. You assume your customers will keep on coming back since there is nothing better available. Ultimately you lose your customers since they move on to products and services that serve their needs better.

Preventative measures that you should practice

Why businesses fail and how you can protect yourself

Simple and effective preventative measures that I highly recommend you should practice in your business:

  • PLAN: From the above comparisons we can clearly see that the general reason why businesses fail is due to planning not done properly. I cannot say this enough: Plan properly, and implement it thoroughly. Even if your planning is not perfect (you can always adapt it in future) it makes a huge difference in any business since you know where you are going and have measures in place for most aspects in your business. That is why business financing firms worldwide require an extremely thorough business plan before even considering funding for any business or expansion.
  • MONITOR: You should be aware of what is happening in your business. If you have staff, ensure you get feedback. Pull reports from your business and financial software. Get customer feedback. The more information you have about your business, the better chance you have to address its weaknesses, react to problems and capitalise on its strengths.
  • ADAPT: I would carefully highlight this as the most important aspect for business survival. There is a dramatic change in the way business is done … we are not yet fully submerged into the digital era (social media, online shopping, search engines) and now another big change is coming soon (video content and virtual reality). If you cannot stay relevant to these technologies or carve out a niche outside of it, you better have a good retirement plan in place!
  • LEAD BY EXAMPLE: As the business owner you need to lead with passion, setting a clear direction where the business is going and how it should operate. Your staff (and your customers) will appreciate a great leader and will recognise that you have a clear plan in place. This will lead to greater loyalty for both parties.

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