The top reasons businesses fail could occur at nearly any time from startup to late stages during the life of a business. Find out what to look for and pay attention to these five warning signs of business failure so you can address problems while they’re still small.
5 Common Problems and Fixes that are the Reasons Businesses Fail – Infographic
A report from the venture capital experts at CB Insights offers insight into 20 reasons startups fail. The truth is, there is no magic timeline a business will cross that makes it less susceptible to the same challenges startups must overcome to avoid becoming another statistic.
Knowledge is power! The key for business success, regardless of how long your company’s doors have been open, is knowing how to identify small problems and apply the right fixes so that small problems don’t become problems that are too big to fix. Scroll to the bottom of the article if you want to take a look at the infographic with top reasons businesses fail before reading the details.
Top 5 Reasons Businesses Fail and Fixes for These Common Problems
1. Lack of Demand
42 percent of business owners cited in the study pointed to lack of market place demand as the factor that contributed most to the demise of their business.
The fix to this lies first in the research you do beforehand starting your business or launching a new product or service to determine that sufficient demand exists in the market place, and that your business will have access to a large enough target audience to support sales at a profitable level.
Secondarily, success depends on your ability to actually plan and execute marketing which produces the sales needed to make the business (or product or service line) profitable. From the study, marketing plays a major factor not only in the most common reason for startup failure, but several others as well:
- 42 percent had inadequate product or service demand
- 19 percent got “out competed”
- 17 percent didn’t have a good product
- 14 percent had ineffective marketing
- 13 percent pointed to product-to-market mistiming
- Another 13 percent lost their focus
- 9 percent said their business was in the wrong location
- 7 percent said they failed to pivot and 10 percent tried to pivot, but failed
All of the marketing-related factors in this list of top reasons businesses fail can also lead to lack of demand. The prevalence of marketing issues in the list underscores the need for every business owner to have a comprehensive marketing plan that acts as both a directional compass for everyone in the company as well as a reporting and benchmarking tool that indicates whether the company is on track or adjustments need to be made.
2. Lack of Capital
29% of business owners said their startup failed because they ran out of money. Few businesses can be started without a significant amount of working capital, but the startup phase isn’t the only time that financing could help a business grow more quickly, sustain itself during periods of low cash flow or fund unexpected repairs or maintenance.
Just as it’s important to have a marketing plan that projects demand and lays out strategies to generate sales, it’s important for business owners to have a business plan that demonstrates accurate projections not only in terms of revenues but expenses as well. A business can have a lot of sales but – due to cost of goods sold – still have inadequate cash flow, so focusing on getting your business to a point where revenues continually exceed expenses is just as (if not more) critical than simply increasing the rate of sales.
If your company is a B2B (business-to-business seller) and invoices its customers on terms, invoice factoring can eradicate the problem of low cash flow, when the gap between when invoices go out and customer payments come in makes it difficult to take on new business or keep up with expenses. Unlike many other business finance tools, invoice factoring can be used by startups, enabling them to expedite cash flow right away, so working capital can be reinvested in the business more quickly.
Staffing and temporary employment agencies often use factoring payroll loans – essentially factoring invoices only in order to fund payroll – rather than using factoring to expedite the majority of their customer invoices. Though primarily utilized in the staffing industry for this purpose, any business that qualifies for factoring can use payroll factoring loans in the same way.
When your business needs a lump sum of working capital or access to a line of credit, business loans, advances, and equipment financing could be the most appropriate way to get fast access to the funding you need. In most cases, these types of financing could be available to your startups after it has been in business for just a few months. This makes these tools more accessible to startups or young businesses, unlike bank financing which may require your company to show several years of sales activity before underwriters agree to extend a line of credit or a working capital loan.
Running out of money isn’t the only cash flow-related problem cited by startup business owners whose organizations failed:
- 29 percent ran out of working capital
- 18 percent had pricing and cost issues
- 17 percent didn’t have the right business model in place
- 13 percent pointed to problems with their investors
- 8 percent cited lack of investor interest
3. Lack of (the Right) People
23 percent of business owners said they simply didn’t have the right team in place to create success for their startup. In some cases this means a business had people in place that weren’t right for the job; in others, it means there weren’t enough people to get the job done.
Ironically, fast growth can lead to people problems. No matter how long a business has been in operation, if your company doesn’t have a plan in place for hiring to accommodate growth, or you do not put a framework in place to cultivate the type of company culture you want to foster, it’s more likely you will have staff-related issues. These issues can turn into big problems if bad hires lead to damaged customer, vendor or employee relationships, negatively affect morale, or if lack of a plan leads to growth that can’t be handled by you and your staff, which can lead to burnout, bad customer service and other problems.
Business owners failed cited several people-related issues in the CB Insights study of the top reasons businesses fail:
- 23 percent had the wrong people in place
- 14 percent said they ignored their customers
- 9 percent said they lacked passion
- 8 percent pointed to owner or staff burnout
4. Lack of Competitive Advantage
Even though we referenced this in the first point above as a marketing issue, it’s worth talking about the 19 percent of business owners (that’s one out of every five) who said that competitors outmaneuvered them, directly causing their startup to fail.
Before you start your business or prior to the launch of new products or services, assessing market place competitors (direct and indirect) is vital. Not only should you gauge the sheer number of competitors who could potentially limit your company’s market share, you should build a profile on each of your main competitors that details how they might respond to your launch, and what you will do to overcome the competitive challenges you face.
If your main competitors tend to be slow to react to market place changes and you can identify areas where your company has a competitive advantage (price, features and benefits, customer experience, etc.), you may find it easy to attract, engage and convert members of your target audiences. If, on the other hand, your likely competitors have a track record of pivoting quickly and doing all it takes to keep newcomers from getting a foothold in the market, your competitive advantages and marketing need to be practically bullet-proof. Make sure you have a plan that details how you will quickly gain market share, so that even in the face of serious competition, you can quickly establish a customer base for your startup or new product.
5. Lack of Advisers
8 percent said that failure to access a network of peers and advisers led to the downfall of their startup business. Lack of expertise could be a contributing factor in several of the reasons cited by business owners whose startups failed:
- 23 percent didn’t have the right team in place
- 17 percent didn’t have the right business model
- 13 percent had problems within their group of investors
- 8 percent couldn’t interest enough investors
- 8 percent faced insurmountable legal challenges
- 8 percent didn’t have – or didn’t turn to – peers or mentors for help
Whether you’re an entrepreneur whose business is in its infancy or your company has been in business for years, having a network of people whose expertise and advice you can tap when challenges arise can make or break the long term success of your business. In fact, for nearly all of the reasons businesses fail cited above, tapping the expertise of other people who have knowledge and experience in facing the same types of challenges can enable you to quickly identify and stop small problems before they lead to big business disasters.
Feel free to share our infographic on the top 5 reasons businesses fail – we would appreciate a link back if you do. Cheers!