What causes a business to fail?

What causes a business to fail?

Authored by Kelly Burton

Kelly Burton

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Approximate read time: 3 minutes

When a business fails, the question on everyone’s lips is usually: ‘why?’ As you can imagine, there is never one straightforward answer to this question.

In the vast majority of situations, business failure is not down to one specific event, but a combination of smaller factors. If left unresolved,  these can have a detrimental effect on the business’s ability to operate, leading to its eventual failure.

Five common reasons why a business may fail:

  1. You started your business for the wrong reasons
    There are many reasons why you may wish to start your own business. Maybe you seek to profit from your creative talent, or simply crave the freedom of ‘being your own boss’. However, expectations are often countered by reality, and the perks of independence can be outweighed by the immense responsibility of managing an active business. In some unfortunate cases, a business owner may find that the reality of the situation is completely different to what they expected, and ultimately the business may fail.
  2. Poor Management
    It is common for new business owners to lack relevant business management skills in areas such as finance, purchasing stock/assets, and hiring and managing employees. If the business owner doesn’t recognize the areas in which they are lacking, and take action to improve on these, this can ultimately lead to the business failing.
  3. Insufficient Capital & Lack of Financial Planning
    A common fatal mistake for many business owners is misjudgement as to how much funding a new business needs. This, combined with unrealistic expectations of incoming revenue, can lead to many new businesses failing before they have had a fair chance to succeed. It is crucial, therefore, that any new business is combined with a realistic financial plan for its first few years of operation. This should account for scenarios in which revenue may be lower than expected.
  4. Overexpansion
    If a business begins to show signs of success, it can be all too tempting for its owners to look to expand. If this is carried out too hastily, and proves to be unaffordable if trade slows down, then the business may fail. It is much more beneficial to maintain slow and steady growth, ensuring that patterns in business fluctuation are recognised before you seek to expand.
  5. Poor Marketing & Web Presence
    In business, the belief of ‘if you build it, they will come,’ can be misplaced, leading to little attention being paid to marketing engagement/web presence. Quite simply, a strong marketing campaign should be at the forefront of any business hoping to succeed. Even the most exciting of products and services will flop if they aren’t promoted to the market.

In Summary

There are several reasons why a business may fail. Much of the time, these can be prevented if the right action is taken to build upon any issues that the business may be facing.

Many of the common issues that cause business failure can be put down to lack of experience. Failure to manage a new business effectively can lead to cash-flow problems, overspending, and the business accruing unmanageable debt. All of these issues can lead to a business failing.

It is crucial, therefore, that a solid, realistic plan is devised before the start of any new business. This should account for scenarios in which revenue is lower than expected, and should also include a strong marketing strategy to get the business off the ground. Preparing to this extent can protect you from the unforeseen causes of business failure listed above, and put your business in step to succeed.

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