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12 Reasons Why A Business Fails

KC See 0

Running a business isn’t always easy. There are so many things to think about and decisions to make. A wrong decision or mistake can hurt your business and set you back.

I speak from experience-because I started over 50 different businesses ventures and projects throughout my 35 years entrepreneurial journey. Today, I have only 15 left.

So, what happened to the rest?

They were sold, transformed, closed or even, just died. I have no regrets as this is a part of my learning experiences and I treasure them.

Although the experience and the learning have been tremendous, and I certainly don’t suggest that you do what I did. Learning business by making a lot of mistakes is a very painful and costly way to learn.

As I look back on these lessons, I realise that they’re really great lessons for others who were like me 35 years ago- bright-eyed, bushy-tailed and eager to go. I’d like to share 12 lessons I have learned with you so that they can help you just as much as it would have helped me if I have learnt them when I started.

1. Wrong Business Partner

A wrong business partner with different values or partners who may have other agendas that you may not realise could spell disasters for your business.

We need to know how to identify a right partner from the beginning by knowing precisely what he wants from the partnership, what are his objectives and core values, as well as how you can leverage on each other.

One of the worst possible things that could happen to your business is having a partner who has other interests that are not aligned to the long term goal of the business.

For instance, your partner may want to cash out on the business by selling his shares to other individuals that you don’t know, and you do not have any control. He may want to sell part of the assets (based on his shareholding) that you need to run your business, but you don’t have sufficient funds to buy the assets. The result will probably drag your business down with huge financial burden and your operations could suffer damages.

Therefore, in order to prevent bad partnerships from forming, you need to enter into a partnership agreement or shareholder agreement before making the relationship official in order to protect yourself and your business. Unfortunately, a lot of businesses started off with a lot of excitement and optimism and little attention is paid to setting the ‘rules’.

2. Insufficient funding

One of the top reasons for business failure (especially small business) is the lack of sufficient capital to keep the business in operation.

You should never underestimate the funds you are required to run a business. A cash crunch will ruin the unwary businessman, where they find themselves having insufficient cashflow to market their products or services or to pay the salaries of the workforce. At its worse, you might even drive away your top talent as you fall into cash flow problems.

But you can minimise the cash flow risk. Successful businesses know their numbers. They invest their time to manage budgets, prepare and review business plans, as well as regularly monitor their financial performance. It is also important that you have realistic and perhaps even conservative forecast of the income and not be overly optimistic.

Also, reserve additional funds for your business by raising capital from not only relying on one channel (bank loan) but from various sources such as investment from business partners, crowdfunding, P2P funding and even public listing. 

However, a lot of business owners have not learnt how to raise funds. They think naively that the only source is to go to the banks.

Read this article: Raise Capital To Unleash Your Business Growth & Value

3. Falling love in with your idea instead of the customer

New start-ups inspired by the likes of Jack Ma or Steve Jobs might think that they have come up with a ‘killer’ product or service that is going to rock the world and are perfect for the market.

Unfortunately, results don’t always work as anticipated. After they have launched their products and services, they might be hit with the reality that the market doesn’t really want what they have offered. They fell in love with their idea instead of the customer.

They should have some form of market research and analysis before the launch of their product or service. Unfortunately, they are so obsessed with their “great idea”, falling in love with it and failing to check if their potential “customers” would equally be as excited. They need to understand their potential customers first and what they want, instead of what they want to give them.

Take me an example. When I launched my first software- a training needs analysis software, I was very excited about this product, thinking it will create value for enterprises and every training manager would love it. I assumed that the demand for this product would be high and customers will flock to it right after. But it did not happen.

There were only 5 companies that purchased the software, and none of them bought the yearly renewal after the license period expired. It was then that I realised the demand for this product was not as strong as I expected, and I had not done sufficient market survey to identify the market’s needs. 

4. Underestimating the complexity of the business and failure to learn. 

Running a business is not simple, it’s more complex than you think. There are a lot of other things that you’re not might not be aware of, but which are very critical to running a business.

Globalisation, technology, regulatory requirements, new technical skills and interconnectivity all add to the complexity. Underestimating the complexity of your business can come with a hefty price tag: you can just get lost in an increasingly competitive environment.

Today, the business world is more complex than it used to be. The business itself might be simple but competition drives business owners to constantly learn new technologies, processes, procedures and regulations, in order to stay relevant and thrive in today’s fast-changing market. 

In the pursuit of providing a better-quality product or service at a lower cost and delivering in half the time with triple the customer’s satisfaction simply means that we need to learn. There is no fixed and proven way. Today’s success could become tomorrow’s failure. Look what happened to Nokia.

5. Poor internal controls and lack of financial discipline

As an entrepreneur, you should not only focus on the big picture of your business, but you also have to impose internal controls. Lack of internal controls can cause the loss of assets, loss of resources and data, as well as a decline in revenue and profit. It will affect your business’ financial sustainability and reputation.

There are some common deficiencies found in businesses:

  • Lack of ability to track performance against budgets, forecasts and schedules
  • With no oversight and review, you’ll only realise that something went wrong when you lost control over the internal matters.
  • Lack of control with authorisation of transactions leads to illegal transactions include pilferage or misappropriation of assets by employees.
  • Lack of attention to information security will result in security breaches of financial data and customer records.
  • Inadequate documentation/ records, which may make you unable to track all the history records when things go wrong.

Along with this is the lack of financial discipline arising out of lack of understanding finance. A common mistake is treating sales as profits.

Good sales do not always mean good profits. If you spend more than you earn it simply means you are losing money. The other common bad habit is treating the money in the business as your personal money.

If you don’t separate it, you will run the risk of losing of where your business is heading.

6. Unable to find the right people to run a business

In short, you have a business, or you have an idea on how to build and run your business, but you can’t get the right team of people to run it with you. It’s impossible to do everything alone, especially when you want to expand your business. You need a team that possess different skills, such as management, marketing and finance, financial controls, and talent development. 

So how do you define the right people? These are people who have specific competencies to fit your company’s requirement in the growth path. And that cannot be chosen out of convenience such as getting your best friend into your team when he does not have the competency required.

Building a strong team is critical to the success of any company. If you want your business to grow big, then you definitely need help from others and the right help.

I’ve talked about building the right team for your business in the previous article. Read this article for an in-depth discussion on it: Building The Right Team For Your Business

7. Unaware of the competitive market environment

One of the biggest mistakes you can make is not realising that you’re going into a business or an industry that is saturated with players operating at a bigger scale, with perhaps much more funds and extensive market exposure.

If you insist on moving into a particular business, it’s important to examine your competitors’ possible responses to your entry, so that you can maximise the impact of your decisions.

You can use the information that you gather from the market to create marketing strategies that take advantage of your competitors’ weaknesses and gain a competitive advantage. In most cases, you need to find yourself a niche that the bigger players are not paying attention to. Or they are simply not interested in that market.

Otherwise, you might find it very difficult to compete with them.  They can use their resources to obliterate you, simply because they can.

8. Trying to do too many things at the same time

Sometimes, less is more. Business owners who try to do too many things could ruin their businesses.

When I was young, I was passionate. I wanted to do everything. I was enthusiastic, energetic and positive, eager and ready to jump into any ventures (or misadventure). In other words, I was completely unfocused.

As you know, I used to have started over 50 businesses, but most of them failed. I made money in some cases, and I lost money in others. Nevertheless, one thing was for sure. I lost focus.

Thus, my message to entrepreneurs as a business owner and consultant, is “focus.” It’s better to be known for and to do one thing extremely well than to do many things poorly. 

That does not mean you should not and cannot have multiple businesses. You definitely can but two rules apply: 

  1. You need to do one thing at a time
  2. You need a very strong backup team to run the business when you move on to other things.

9. Underestimating the cost of customer acquisition

You might think, that your product or service is very good, surely people will just flock to it.

Yes, you might be probably right. But if you underestimate the cost of bringing in the customers-the customer acquisition costs. These are costs in the form of marketing and sales expenditures (including salaries and other headcount-related expenses), commissions, cost of lead generation and third-party cost.

Let’s refer to this simple calculation to calculate the cost of customer acquisition (the price you pay to acquire one new customer):

Customer acquisition cost = Monthly Customer Acquisition Costs/ number of New Customers in the month.

For example, if the average cost of acquiring a customer is $10 and the average sales per customer is $20, it would simply mean you are losing money every time you get a sale if your cost of sales is $15! 

I am using an oversimplified example to put a point across. This would mean your business unviable and unattainable. So, you must calculate your cost properly. However, if it cost you $1 to bring in a net margin (sales amount less cost of sales) of $5, how many $1 should you spend?

10. Too far ahead of your time

If you’re too far ahead of the curve, you’ll bear a disproportionate cost of innovation, and the risk of having a market unprepared to see the value you’re offering them. 

For instance, you launch an innovative product in a particular industry, but the market is not ready for your product. Still, you believe your product has strong market potential. So, you keep investing money to market the product and waiting for more people to buy it. But in the end, it doesn’t work as what you really expect, and you run out of money. Classic story- very often mine. 

I’ve experienced many similar painful moments before. One example is when I launched one of Asia’s first online learning portal in the year 2000 providing live webcast and online seminars. (this was before Mywebinar or YouTube). This was at a time when the market did not have enough bandwidth and the market is not really ready for online learning. It has a good take on rate but no recurring business. 

I didn’t lose much money from the business, but I lost my time, energy and reputation but in the end, the business was not a sustainable business. I am just too far ahead of my time. Timing is key when you launch an innovation. 

11. The ability to retain essential talents for the business to grow

Every business owner needs to surround himself with a team of talents who possess specific skills that are essential to support the business. These talents when well-placed and given a chance to contribute can have an enormous impact on business results.

The key challenge, however, is retaining these talents.  If your talents leave the company, your business might be affected and may not function well. As a result, it might constraint your business growth or in worse cases, contribute to a certain decline.

Thus, you should know how to retain these essential talents in your business, such as:

  • Understanding individuality and their needs and goals.
  • Providing directions and vision and aligning them with the talent’s own goals.
  • Communicating openly and regularly.
  • Recognising good work and rewarding it
  • Creating a high energy environment

Don’t try to have everything for yourself. Be willing to share successes with your team. Nobody will work for you long term unless there is a good reason for them to do so. Every different person has different aspirations, so if you want to retain them you need to align with their needs in the long run.

12. Legislative constraints that prevent the expansion of the business

For all business owners, one should be aware of the existing or changing of legislation imposed by the government, as it will affect your business expansion and future outlook. It’s like in sports, if you want to play the game well you need to know the rules. More so if the rules change frequently.

For instance, I once started a business without fully understanding the government legislation. It was only after I started the business did, I realise that the government did not permit me to advertise or market certain products. This restriction capped my business growth, despite the product having good market potential.   

So, you must be aware of the government policies and find out more details before you jump into a business, in order to minimise the risks.

I hope this article with my over 30 years of real experience has been useful to you. If you can avoid these 12 mistakes, then you will be very successful.

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