Why Businesses Fail
The Win-Won Business Mindset (#4): “4 Common Themes - Why Businesses Fail”
In its simplest form, a business exists to provide products or services in the marketplace for a profit. There are many variables and considerations, but ultimately, if a business cannot consistently turn a profit, it will not be able to survive in the long term.
Here are 4 common themes that can lead to a business failing:
1) Ineffective Management (Leadership)
Most businesses are organized in a hierarchical structure, with owners appointing individuals to control and run operations. While everyone has specific responsibilities or roles, leadership holds a high degree of authority, and its decisions have a disproportionate impact on the business.
You could have a great business with a strong vision, sound strategies, and products or services in demand. But if you cannot execute effectively, failure is inevitable. Some key characteristics that leadership must possess include:
- Being proactive and visionary
- Taking ownership and addressing problems effectively
- Delivering on commitments and maintaining a good reputation
- Consistently performing and executing
- Empowering and motivating others
When leadership lacks these characteristics, cracks begin to form. And when too many cracks emerge, the foundation may eventually give way.
2) Strategic Blundering
If the primary goal is to sell products or services for profit, then effective strategies are essential to achieving the business's objectives. Strategies can fail for a multitude of reasons, here are just a few to watch out for:
- Lack of planning or forecasting
- Ignoring client feedback
- Putting all your eggs in one basket (e.g. relying on a single client or product/service)
- Failing to understanding your market or audience
- Operational failures or bottlenecks
Choosing effective strategies is a challenge in and of itself. Equally important is the ability to execute, monitor, and adjust those strategies as needed. Lastly, knowing when to terminate a strategy altogether is difficult, and if you wait too long the business may never recover.
3) Financial Mismanagement
Most things have limits: time, energy, and resources, to name a few. These elements are subject to the laws of scarcity and must be managed effectively to achieve a desired outcome. Businesses function as productive ecosystems, relying on these inputs and many others. Finances serve as a measurement of inputs and outputs, reflecting the efficiency and sustainability of the system. Here are some indicators of financial mismanagement:
- Improper capital allocation or structure (e.g. overleveraging with debt)
- Poor cash flow or liquidity management (e.g. running out of cash)
- Immoderate compensation or dividend payments
- Inordinate capital expenditures
- Excessive spending or lack of cost controls
- Ineffective risk management and financial oversight
If the finances are not managed properly, or if adequate controls are not in place, the entire business is at risk, regardless of how well it operates in other areas.
4) Out-Competed
Most open-market economies are highly competitive. Even well-run businesses can fail when competitors enter the market offering products or services that are better, more affordable, or simply more appealing to potential buyers.
Understanding your competition is not enough, you must also anticipate where your industry is headed in the future and be ready to adapt. The implementation of technology and innovation has become synonymous with staying competitive. Businesses that fail to evolve will almost certainly be out-competed.
Running a business can be a wonderful and rewarding endeavor. However, businesses fail for a variety of reasons, and you must be able to identify risks, many of which may be unknown or lie dormant until the future unfolds. Success demands a combination of knowledge, creativity, proactiveness, conscientiousness, perseverance, and many other vital attributes.
The ability to learn from mistakes, recognize risks, and adapt is arguably among the most important lessons in business (and in life).
“The Win-Won Business Mindset” is a series by Win-Won Business Consulting designed to share insights, ideas, and strategies for small businesses and entrepreneurs.