6 Reasons Why Businesses Fail

There have been many articles written on the subject of why large and small businesses fail, and most of them point to the same common reasons, such as:

• Not qualifying for adequate financing: This can limit a business’s ability to invest in growth, hire talent, or weather economic downturns.
• Bad physical location: A poorly chosen location can hinder customer accessibility, increase operating costs, and limit market reach.
• Lacking a well-thought-out business plan: A business plan serves as a roadmap, outlining goals, strategies, and financial projections. Without one, businesses may lack direction and struggle to make informed decisions.
• Poor inventory management: Inefficient inventory management can lead to stockouts, excess inventory costs, and missed sales opportunities.
• Functioning without a dedicated management team: A strong management team is essential for providing leadership, making strategic decisions, and ensuring efficient operations.
• Expanding too quickly: Rapid growth can strain resources, lead to quality control issues, and increase the risk of financial instability.
• Ineffective marketing strategies: A poor marketing strategy can hinder brand awareness, customer acquisition, and sales.
• Inability to adapt to market changes: Businesses that fail to adapt to changing consumer preferences, technology advancements, or economic conditions may become irrelevant.
• Failure to keep overhead costs low which creates cash flow problems: High operating costs can reduce profitability and limit a business’s ability to invest in growth and meet financial obligations.
• Underestimating competitors or not having a strong competitive advantage: A lack of competitive edge can make it difficult to attract customers, differentiate from rivals, and sustain profitability.

These reasons are widespread and no doubt cause many businesses to fail. However, the reason for a company’s failure is not always something so obvious.

 

6 Reasons Untold Reasons Why Businesses Fail

Below are 6 lesser-known reasons why a business might fail.

Why do these reasons remain untold?

Simple. Most of the time, business owners don’t realize that these reasons caused their failure, and business consultants generally don’t ask the kinds of questions that would identify them.

 

1) Focusing on Short-Term Profits Rather than Building Long-Term Value

It’s important to be profitable, but NOT when short-term profits come at the expense of the long-term value of the business and the lifetime value of the customer.

Here’s a real-life example: In the late 1990s, there was a franchise of a national smoothie shop located in West Los Angeles, CA. At this store, smoothies sold for about $4. They cost only around $1 to make, resulting in a solid profit. However, certain ingredients, like mangoes and berries, cost more than the other ingredients, such as juice and frozen yogurt. Since juice and frozen yogurt were cheap, the franchisee put more of these ingredients in their smoothies and less of the expensive ingredients. By doing this, their profit margin per smoothie grew by approximately 20 cents, which seemed great… on paper. Unfortunately for the store, customers weren’t satisfied with the taste of the lower-cost smoothies, so people stopped going there, and the store eventually went out of business.

As you can see here, it’s important to consider the lifetime value of a customer. Repeat business is way more valuable than short-term profits. Saving 20 cents on a smoothie today will cost you big in the long run.

 

2) Ego Business vs. Business Opportunity

The foundation of a good business is a good business opportunity. As an entrepreneur, you need to conduct market research to identify how your business will fill a need in the marketplace. Unfortunately, many small businesses are started solely to fulfill an entrepreneur’s ego (or, to put it less harshly, to satisfy one of the entrepreneur’s interests).

This can often be seen in the restaurant & bar industry, where too many entrepreneurs open shop because it’s a “cool” thing to do. Such new businesses rarely succeed.

 

3) Life Distractions

The best ideas don’t always come between 9 and 5. A person might have a great idea while driving, or in the shower, or while working out. It’s moments like these when an entrepreneur leaves behind the day-to-day tasks of running a small business and gains a better perspective of the big picture.

Sadly, there are a lot of things that can disrupt a person’s home life. Illness, death of a family member, divorce, relationship trouble, and problems with a child are just a few of the many issues that can affect a person’s mindset. When things like this occur, moments of clarity are replaced by stress and anxiety.

Most businesses depend heavily on new ideas and creative thinking, and when an entrepreneur’s head isn’t clear, business can suffer.

 

4) Bad Feedback & White Lies

People like spending time with friends and family.

Unfortunately, when it comes to business, friends and family members don’t always give the best advice. This is especially true when a new business launches. Nobody wants to be a buzz-kill. No one wants to tell an entrepreneur their idea is bad, or their location stinks, or anything else negative. Most people are conditioned to be supportive of their friends and family regardless of the situation.

Plus, nobody wants to be wrong. Imagine your friend has an idea that you think is terrible. You share your objections, but the friend goes ahead with the idea anyway and finds business success. Now you’ll always be the naysayer that never believed in them. Nobody wants to be that person.

That’s why you’ll rarely get honest, objective business advice from friends or family members. And yet, oftentimes friends and family are the first people entrepreneurs turn to for advice.

 

5) Maybe the Business Owner is Just a Jerk

There are a lot of great people in the business world, but there are also some jerks. And these jerks sometimes start their own companies.

A jerk, in this case, is someone who a lot of people can’t get along with. Maybe it’s because they’re super-perfectionists, they yell a lot, they demand that everything be done in a certain way, or they constantly complain. Or maybe they’re annoying in some other way.

The key is that nobody — not employees, customers, partners, suppliers, clients, etc. — wants to give 100% for a jerk business owner. Clients and customers will be turned off, and employees will start cutting corners. Most people believe that life is too short, and don’t want to spend their time working with someone they can’t get along with.

 

6) The Entrepreneur Never Took the Full Leap

In most new businesses, the entrepreneur never leaves their day job, they create a backup plan, fail to complete all the components of their business plan, or have a job lined up in case of business failure. In these cases, failure IS an option, as the entrepreneur has a safety net to fall back on. In cases where business failure is NOT an option, and the entrepreneur depends on the new business to provide food, shelter, and clothing, the business has a greater chance of long-term success.

There’s a great example of this concept in this NY Times article. Xiang Yu was a third century (B.C.) General in the Chinese army. He led his troops into enemy territory by crossing the Yangtze River. Then, to inspire his troops, Xiang Yu took some unorthodox measures. He burned all of his troop’s ships and destroyed all of their cooking materials. This left the troops with only two options: Move forward and conquer the enemy, or perish. The maneuver did not make Xiang Yu very popular with his soldiers; nevertheless, the troops advanced and ultimately emerged victorious.

Xiang Yu’s methods might be a little drastic in this day and age, but the moral of the story is what’s important. Author Anita Roddick has said that entrepreneurship is a matter of survival, and the truth is, if you’re not totally committed to your business, your chances for a successful business will diminish.

 

Evaluating Your Business: Are Untold Reasons Causing Your Failure?

As a business owner, it’s crucial to identify the root causes of your business’s struggles. While many common reasons are well-documented, there are also less-known factors that can contribute to failure. To determine if one of these untold reasons might be affecting your business, consider asking yourself the following questions:

• Long-term vs. Short-term Focus: Are you prioritizing short-term profits over building long-term value and customer relationships? How will you mitigate company-specific risks to increase likelihood of business success?
• Ego-Driven Business: Is your business based on personal interest or a genuine market opportunity? Do you have a unique value proposition that will help you create a successful business?
• Life Distractions: Are personal challenges or distractions hindering your ability to focus on your business? Do you have a minimum viable budget or cash reserves in the event of a challenge?
• Objective Feedback: Are you receiving honest and objective feedback about your products or services from sources outside your immediate circle? How are you soliciting honest feedback about your product or service?
• Leadership Style: Are you creating a positive and supportive work environment, or is your leadership style hindering your business’s success? Are you taking the time to successfully oversee other employees and provide constructive feedback to build a strong team?
• Commitment Level: Are you fully committed to your business, or do you have backup plans or safety nets that might be limiting your dedication? Do you have the skills necessary to create and sell a viable product or service?

By honestly assessing these factors, you can gain valuable insights into your business’s challenges and take proactive steps to overcome them.

 

Conclusion

The reasons why businesses fail are complex and multifaceted. While many common factors are well-known, it’s equally important to consider the less obvious factors that can contribute to business demise. By understanding both the common and untold reasons, business owners can better identify potential pitfalls and take proactive measures to increase their chances of success.

Continuous evaluation and adaptation are key to navigating the ever-changing business landscape. By regularly assessing your business’s strengths and weaknesses, you can identify areas for improvement, seize opportunities, and ultimately build a more resilient and thriving enterprise.

 

 

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