Entrepreneurship statistics often vary. Some estimates claim that up to 95% of new businesses fail within five years. Others say the number is around 65%. Either way, these are staggering figures when one takes into account that most new businesses fail for more or less the same reasons.
Inadequate Planning
As simple as it sounds, lack of forethought and planning is the main culprit behind virtually every business failure. Thankfully, 75% of most business ideas fail on paper (i.e.: the planning stage), which is exactly where a business idea should fail. The only other option is to collapse on the street, perhaps under a pile of debt. Inadequate planning includes (but is not limited to), not fully understanding a product or service before selling it, not conducting detailed market or labor research, not compiling a realistic customer profile, not researching the competition, not selecting a proper business model, not determining all costs beforehand, or, in general, not doing enough preliminary work to determine if all the numbers add up.
Underestimating the Commitment, it Takes to Succeed
In a world where almost, everything is wanted on a silver platter the moment it’s demanded, it’s easy to forget that quality and strength take time to acquire. For example, it can take up to six months or longer to put together a business plan and as much as five to seven years (or longer) to establish a solid customer base.
Cash Flow Problems
If passion, commitment, and planning are more important than money (as stated in Chapter 1), then why do cash flow problems appear at the top of a ‘reasons why business fail’ list? Think of it this way: money isn’t needed to conceive a baby, but once a baby is born it needs to be fed – and the bigger a baby gets the more food it needs. So, it is with a business. Too many entrepreneurs confuse the word cash with the word profit, thinking that they’re one and the same. ‘Profit’ is a word for accountants. ‘Cash’ is what a business feeds on in order to survive. Employees, banks, and many suppliers must be paid in cash – not profit percentages.
Poor Management
Entrepreneurship is the death of management. Paradoxically, it’s also been said that management is the death of entrepreneurship. What these comments refer to is the belief that after setting up a business too many entrepreneurs stiffen into rigid managers that are guided by routines – a problem that probably arises due to the fact that most people don’t know what good management is about. In short, management is not about being a boss. Good management is about serving others: providing for others, motivating people, getting work done through others, and streamlining a business toward making a sale — and that’s just the beginning.
Not Understanding the Importance of Customers
Setting up a new business involves so much work that it’s easy to forget about paying customers. Interior design, bookkeeping, product displays and other non-revenue producing activities – although important – should not be the priority of a business. Successful business operations are reliant upon receiving money from satisfied customers on a regular basis. Yet no matter how simple this concept sounds, it’s surprising how many businesses lose sight of it.
Staffing Problems
People problems usually begin by: (1) not fully investigating the background of job applicants, (2) failing to fully train employees, (3) hiring friends and relatives (in a long-term capacity), and (4) employing people who are clones of the entrepreneur rather than those whose skills will counterbalance the entrepreneur’s weaknesses.
Inflexibility
Small businesses should not act like rigid, inflexible corporations. From the business plan to the marketing campaign to the importance of finalizing a sale, if something isn’t right it should be changed quickly. Change can happen in one of two ways: it can either be done by you or it can be used to run over you.
Poor Marketing and/or an Inability to Sell
Contrary to popular belief, if you build a better mousetrap the world will not beat a path to your door. Equally as true is that good products and services do not sell themselves. Simply put, the success of every enterprise hinge on its ability to sell – and an ability to sell begins by understanding the basics of marketing, promotion, and human psychology.
Not Enough Capital.
Too many new business owners underestimate how much money they need. Not to get their business off the ground, but to keep it running through the first year or so of operations when money is tight. That’s not to say that buckets of money are needed to succeed as an entrepreneur.
Pricing Problems
The price of a product is usually the most significant factor affecting a customer’s decision as to whether or not the product will be bought. Equally as true is that a price contains the profit a business hopes to make. Entrepreneurs want to make as much money as they can while customers want to save as much money as possible.
Lack of a Competitive Edge
Many small businesses start out as a cutout copy of another business, thereby providing no incentive for customers to choose it over the available competition. Every enterprise should therefore have at least one aspect that distinguishes it from its competitors.
Going it Alone
Along with not doing enough research and not establishing a close relationship with customers (as well as suppliers), going it alone means relying totally on your own, infallible, all-knowing and superior intellect. Put another way, so many qualified people, books, education centers, and government programs are available to help entrepreneurs that it simply doesn’t make sense to venture into the marketplace alone.
Growing Too Fast
As odd as it may sound, having too many customers can kill a business. Think of it this way: if a business is swamped with increasing customer orders it has to increase its output, which means that it has to purchase more raw materials, buy more equipment, and possibly hire more personnel. Meanwhile the business is stuck producing the same output until it has the full ability to do more. In other words, expenses soar while revenues stay the same. This lack of incoming cash and increasing debt can result in big problems – and not just financial ones. When a business can’t deliver what it promises word of mouth spreads and customers quickly go elsewhere.