New businesses fail for a multitude of reasons. A lack of sales and cash flow will destroy a business, but inadequate capital and a lack of planning will also bring a business to its knees.
Other obvious business killers include failing to adapt to changes in consumer behaviour or technology.
Management issues like poor record keeping, mismanagement of inventory and failure to delegate can contribute to the collapse of a business.
Underestimating your competitors can prove fatal for a business while expanding too quickly can also trigger trouble. These are all common causes of business failure, however, in some cases they are just the symptoms and not the real problem. For example, a lack of sales will create cash flow issues, but the real problem might be a lack of effective marketing. Incorrect pricing or an inferior quality product will also stop a business in its tracks.
Data released by the Australian Securities and Investment Commission (ASIC) found cash flow issues were the primary reason SMEs go broke and a study released by the Australian Centre for Business Growth (ACBG) reveals some more detailed explanations including:
- 17% of respondents said they didn’t do enough market research, marketing or sales for their business, or didn’t know how to.
- A further 14% said they didn’t understand finance or didn’t have the necessary financial skills to manage their business, lacking knowledge of how to properly fund business growth.
- Broader issues such as drought, interest rates, regulation and global trends tripped up 13% of respondents, who said they had no risk mitigation plan.
Let’s explore some of the major reasons why business start-ups fail in more detail.
#1 NO MARKET DEMAND
Business works on the supply and demand equation. If there’s no demand in the market for your product or service, then it will fail. You need to understand what the consumer really wants and that generally means solving their problem or satisfying their needs. Ideally, the problem needs to be big enough so you have plenty of potential customers and to succeed you need produce a scalable solution. If you can produce a better or faster solution you are on track.
Creating a new business idea is relatively easy – redesigning, adjusting and refining the product or service to meet the demands of the consumer is the challenging part of the business puzzle. As a business start-up you need to listen to your target market and your potential customers. Your family and friends shouldn’t influence your decisions and you might have to invest in some research or surveys to find out what the market needs.
#2 LACK OF CASH
This might sound very obvious but sometimes the business failure is not caused by a lack of funds, rather, the wrong use of funds. Buying too much stock, investing in the wrong type of marketing and employing the wrong staff can drain your cash reserves.
Again, understanding your market is vitally important because your target audience know where and what you should be spending your money on. They can steer you in the right direction and tell you where your prospects can be found. That means you can channel your time and money in the right places. You can burn your marketing budget very quickly on the wrong social media channel or marketing tools.
Your target market can advise you whether to invest in developing new product features or encourage you to keep working on a new product they might pay extra for. They can provide valuable feedback that can shape your future product development.
#3 THE WRONG TEAM MEMBERS
As the owner of a new business you often need to wear many hats. You might need to be the marketing manager, the bookkeeper, receptionist, content writer and webmaster. Having a skilled team can definitely help accelerate your success and the post-mortem from failed businesses often includes statements like, “If only we had a digital marketing expert or accountant on staff”. Others lament that “If only I had a partner to bounce ideas off”.
The right team can make a huge difference but sometimes they are out of financial reach for start-ups. You might find freelancers on fiverr.com or upwork.com that can fill the temporary hole but more often than not, as the business owner you need to upskill or learn how to do the task yourself.
#4 MONITOR YOUR COMPETITION
Every business needs to analyse their competition and never underestimate your competitors. Never stop examining what they are doing in the market, monitor their marketing and understand their pricing structure.
You need to monitor changes in the marketplace and as a start-up you need to understand the landscape before you consider launching. Start by identifying the strengths and weaknesses of your main competitors. They have a share of your market for a reason so understand their point of difference, prices and marketing focus. The more informed you are about their business, the better.
Follow them on social media, regularly review their website and even get on their mailing list so you get their updates, newsletters and details of any new product or service offering. Stalking your competitors might sound unhealthy, however, they are successful for a reason and you can learn from their model. Ignore them at your peril.
#5 POOR MARKETING
When you finally open the doors of your business, don’t expect a queue of customers unless you have the right marketing tactics in place. If you think the moment your website goes live you’ll be inundated with orders, think again. With websites, it’s not a case of ‘build it and they will come’ because Google can take 3 to 6 months to index your content. This means you could be invisible on internet for months after launching your business. Don’t rely on ‘hope and pray marketing’ but map out your marketing plan, because any kind of marketing that doesn’t generate revenue is wasted money and wasted effort.
A lack of sales and cash flow will destroy a business, but inadequate capital and a lack of planning will also bring a business to its knees.
Creating a new business idea is relatively easy – redesigning, adjusting and refining the product or service to meet the demands of the consumer is the challenging part of the business puzzle.
As a business start-up you need to listen to your target market and your potential customers.
Consider the 5 major reasons why business start-ups fail: no market demand, lack of cash, wrong team members, competition, and poor marketing.