Reasons New Businesses Often Fail

New Business Failure

Globally, the failure rate of new businesses is alarmingly high as evidenced by most research. New businesses are important vehicles in addressing challenges of the equal income distribution, economic development stimulation, job creation and sustainable economic growth (Fatoki, 2014). There are two major stages involved in creating a new business. Startup phase, the first phase, is a period in which firms identify products and services it wants to trade in, acquire resources and puts in place essential infrastructure such as human resource. The next phase is new business competition and trading with other businesses in the market. New businesses fail as a result of many reasons both external and internal. Internal causes include lack of experience by management, lack of functional skills, i.e. leading, planning and controlling skills, poor attitudes towards customers and poor training of staff. External factors are those beyond the control of the firm, and they include competition, high distribution costs, lack of a logistics chain, lack of finance, crime and costs of business.

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Reasons for New Business Failure

Liability is a major reason for a new businesses to fail. A combination of internal and external factors inhibits the success of new business ventures. Planning is crucial not only to the success of new businesses but also developed ones. It helps in the identification of new opportunities and further assists business owners in making better decisions for the sustainability and growth of the new ventures (Cobweb Information Ltd, 2015). Businesses need a constantly evolving plan that will help them define their current objectives and develop strategies for attaining them. Lack of focus on objectives results in loss of control of the business. Common mistakes in planning include lack of preparation of a business plan, not communicating business proposals, ideas and plans to funders or partners, taking too much time on preparation of the business plan and not addressing business priorities.

Another logic for new business failure is starting them for the wrong reasons. Most people start a new business to either become rich, work fewer hours or become their bosses. Even though a new business may help one generate a lot of income, it requires good financial and time management skills which most people lack leading to business failure. Most new businesses miscalculate startup fund needs and thus fall short scrambling to sustain the business (Amankwah-Amoah, 2016). There is, therefore, a need to strike a balance between business and the interest, drive and passion that goes with it.

Inadequate funding is another reason for business failure. Lack of startup and working capital is a set up for business collapse. Cash flow shortages usually develop months into trading before the business makes profits. Failures associated with finances include lack of understanding basic financial principles such as cash flow, breakeven, profit and loss (Walsh & Cunningham, 2016). Also, not following up on debtors and regularly losing sales receipts, purchase orders and invoices are financial reasons for failure. Business owners without financial skills are not likely to know whether they are making money or not.

Bankruptcy and business failure has been associated with overexpansion, with most new businesses confusing success and expansion. Indications that businesses may be over expanding include employee difficulty in keeping up with the demands of production and the firms cannot fulfil their customer’s needs timely. However, repressing growth is also harmful to a new business. Business owners should establish a good cash flow and proper customer base and let their success help them in setting the right measured pace (Cobweb Information Ltd, 2015). Focusing on slow and steady growth should be optimum. If expansion is warranted after carefully reviewing, analyzing and researching the market, businesses then need to identify who and what is needed for their firm to grow.

Poor management is another reason for new business failure. Most business owners lack essential management and business knowledge in crucial areas, for example, hiring and management of employees, finance, production, purchasing and selling (Fatoki, 2014). The inability of business owners to recognize what they are not doing well and aptly seek solutions may make the business to fail. Neglecting the new business can also lead to its downfall. Lack of regular study, planning, organization and controlling all business operations are signs of poor management. Business owners should therefore continually study customer data and market research, areas that are prone to disregard once businesses have been established.

New businesses regularly fail because they lack a clear marketing strategy or plan. Not enough customers know of or are prepared to purchase service or products offered by new businesses. To make profits and recover costs incurred, most businesses need adequate customers and sales. Customers can only purchase products and services they know about and those that will benefit them (Cobweb Information Ltd, 2015). Not having a clear marketing strategy places businesses at the risk of pricing their products too high or too low, selling their services and products and services based on features rather than benefits to customers and not legally or accurately describing their services and products.

Starting a new business involves navigation through a minefield of legal rules, red tapes and regulations. Legal issues are not only experienced by new businesses but also stable and evolved ones. Experienced businesses struggle with the legal requirements of running firms. Common legal issues experienced by businesses include not informing relevant authorities when starting a business, putting up a new business without acquiring the statutory local trading licenses, using another person’s trademark, obtaining intellectual rights or business name illegally and failure to comply with health and safety regulations (Walsh & Cunningham, 2016). Key legal areas to be considered when operating a new business include data protection, health and safety, trading standards, business rates, intellectual property, planning permissions and fire safety.

External factors that affect new businesses include institutional and external environments. Political institutions play a significant role in establishing the surroundings in which new businesses are developed (Fatoki, 2014). They have a significant role in providing a predictable and stable environment necessary for the economic growth of businesses. Environments characterized by high levels of civil and political violence and weak institutions have direct effects on the survival of new business ventures. Failure of new businesses may, therefore, be affected by weak property rights, crime, contract enforcement and an education system that fails to support entrepreneurship.

Methods to Help New Businesses Avoid Failing

One sure way of managing, sustaining and growing a new business is coming up with a strong business plan. A business plan is a detailed document that outlines the path by which a new business intends to achieve its revenues. It is therefore paramount that new businesses come up with a strong business plan before launching their efforts. Cash flow management is vital in the development of a new business (Omri, Frikha & Bouraoui, 2015). To sustain themselves, new firms must maintain a balance between cash acquired through sales and that used for their expenses. New businesses should, therefore, strive to bring in revenues while limiting their expenses. Most entrepreneurs are optimistic by nature. They adapt a positive attitude towards their efforts and believe their ideas can change the world. Such kind of optimism may lead them to underestimate future costs and overestimate potential profits and revenue. To sustain and steadily grow their businesses, owners must set accurate and realistic projections in terms of both costs and revenues. New businesses should avoid credit cards, loans and other forms of debt. Even though most businesses rely on loan for setup, the majority are usually not able to pay back in time (Omri, Frikha & Bouraoui, 2015). Companies, therefore, end up spending most of the revenues and profits repaying loans rather than adding employees and expanding their customer base thus losing the flexibility to compete with other firms.

 

References

Amankwah-Amoah, J. (2016). An integrative process model of organisational failure. Journal of Business Research, 69(9), 3388–3397.doi:10.1016/j.jbusres.2016.02.005

Cobweb Information Ltd (2015). Common Reasons Why Small Businesses Fail. Retrieved from: https://nbv.co.uk/wp-content/uploads/2016/01/common-reasons-businesses-fail.pdf

Fatoki, O. (2014). The causes of the failure of new small and medium enterprises in South Africa. Mediterranean Journal of Social Sciences, 5(20), 922.

Omri, A., Frikha, M. A., & Bouraoui, M. A. (2015). An empirical investigation of factors affecting small business success. Journal of Management Development, 34(9), 1073-1093.

Walsh, G. S., & Cunningham, J. A. (2016). Business failure and entrepreneurship: Emergence, evolution and future research. Foundations and Trends® in Entrepreneurship12(3), 163-285.