Why Do Businesses Fail?

Running a business and keeping it afloat, particularly in a recession, can be hard work. However, by understanding the various factors that can cause a business to fail, you can learn how to avoid the common pitfalls.

1. Starting your business for the wrong reason

Perhaps you started your business because you were fed up with your old position, wanted to be your own boss or were seduced by tales of millionaire entrepreneurs that made it big? It’s easy to underestimate the amount of work that you will need to put in to making a business work and the impact that will have on your friends and family. You need to have a real passion for what you are doing and a determination to succeed.

2. Poor market research

Have you researched your business thoroughly? Do you understand the market and where your business fits? It’s very easy to get carried away with a ‘great’ idea without finding out whether there’s a market for it. Conduct market research to find out what customers want and if there is enough demand for the product or service you are selling. Make sure you get objective and independent feedback on your business idea – your family and friends may only tell you what you want to hear.

3. Poor management

Many business owners lack the relevant skills in areas such as accountancy, managing employees, marketing and legal matters. If you know you need help in one of these areas, then consider hiring a professional or finding a course which will teach you the basics. Don’t skimp on professional insurance or managing your books properly, as it could come back to haunt you.

4. Lack of financial understanding

Thoroughly understand your finances and, most importantly, your cash flow. Many people underestimate how much money they will need to set up a new business and you also need to take into account the time it takes for money to come in, particularly if you are selling a service. Make sure you have enough savings to tide yourself over when money is tight. Keep an eye on hidden costs, such as transport, heating and lighting, and delivery charges, which can eat into your profits.

5. Wrong choice of location

A bad location can put an end to your business. If you are a retail business, make sure your shop is in a busy location and in the right area for your target market.

6. Overexpansion

Many businesses fail because they get carried away with their success and borrow money to expand their premises, hire new staff and extend their product range too quickly. Aim instead for a steady and slow growth and be prepared for lows in business as well as highs. At the same time, make sure you adapt to a changing marketplace. If more of your customers are choosing to shop online, for example, make sure you have a website.

7. Not listening to customers

Ask for, listen to and act upon customer feedback, even if it is negative. Referrals and repeat business are essential, and if people don’t like your business, they will go elsewhere, taking their friends with them.

Rachel is a business blogger currently on the lookout for businesses for sale.

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