The Main Reasons Businesses Fail
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The root cause of business failure is lack of education – running a business is a trade all of its own. This is not covered at school along with money management when it should be. It should be considered as important as reading, writing and arithmetic.
I believe that business education is an essential life skill. If the school system will not provide the education, you must do it yourself as a form of future proofing.
Even if you do not intend to run a business, there is much that will assist with day to day life.
Whether you believe it or not every single person is a business. Where money is involved, it is a business.
Think of a phone number where each of the digits is a business process. If you fail to dial all the digits in the right order you cannot achieve connection. Dialing extra digits will achieve nothing.
Table of Contents
Failing to Treat the Farm as a Business
Failing to treat the farm as a business is the primary reason a farm will fail. If you do not treat your farm as a serious business, how can you expect it to flourish?
Where there is no respect, it is only a hobby and like a hobby it will continue to cost rather than create a profit.
Business failure statistics are brutal – they need not be – they should not be.
No Competitive Advantage
Your competitive advantage is built into your business model.
If you have no competitive advantage, you are playing the “Me Too” game and cannot expect to win against established competition. You will be a price taker, not a price maker.
There is no outstanding reason why people should buy from you specifically.
The main driver for customers is convenience – even more so than price. Using the Lean Startup Canvas, identify a viable “Unfair Advantage”.
Insufficient Startup Capital
Every business needs money to start and continue. The accepted figure is 12 months wages (including yours) and costs in the pocket before you start or a second income to cover both personal and business costs with a safety margin for contingencies.
Bootstrapping a business is not romantic – it is hard work and stressful. I do not like operating one step in front of the gun. Too much time and effort is wasted playing hopscotch with overdue invoices.
The usual rule when estimating is to double your expenses and halve the income. This will cover most surprises – just – and surprises there will be. Surprises are a law of nature.
Giving Up Too Soon
Most people have heard the 3 feet from gold story. A family bought a rough block in the US and started digging for gold – found none and finally sold out. The new owners who were keen started digging and found gold 3 feet into the main tunnel. I know mining is often a huge gamble.
You can reduce the risk in business by proper planning and research.
Unless you have a very good reason, do not give up too soon. Having said that, be careful not to go down with a sinking ship. There are times when it is good sense to bail out, but only after a damn good try.
Often the solution is to change the way you do things. Give serious thought to whether the failure is the business or a part thereof. If it is a part, what is the cause of the failure? Can it be improved? Root Cause Analysis is your best friend here.
Poor Cashflow
You have no doubt heard the old maxim that “Cashflow is King“. Cashflow describes the money flowing through a business. Positive cashflow is where there is more IN than OUT. Negative cashflow is the reverse.
The flow of funds into a business has far more worth than a high capital value. Picture a (slightly skewed) example where a business has a large payday once a year (like the annual wool payment or the annual stud sale), but bills every week. Do they have the reserves to make it to the end of the year?
Often the business is profitable on the books but simply does not have the legs to reach payday. Add a small amount of weekly money and the situation is less grim. The situation can be managed with a bit of juggling.
If you cannot pay the overdraft out at paycheck time then the bank owns you and your business.
Poor Market Research
Not understanding your market is a recipe for disaster.
The customer will do what the customer wants and not what you wish they would do. If you have the best and cheapest red widget on the market and the market is not interested, you are in a tight situation. Often this goes hand in hand with a manager in denial – “but it is the best red widget in the world!”.
Better you understand your market dynamics before you take the decision to build.
“Build them and they will come” does not always work.
Market research will help you identify what the customer wants, how many and what features are important. A valid approach is to design your Minimal Viable Product with a customer set and testing for market acceptability prior to manufacture. This will go part way to determining that you do have a market before you invest your funds.
Market Size
Is the marketplace large enough? You are better selling into a large market than a small one.
The Competition
Are the competition better and more efficient than you? Can you disrupt them with a different way of doing things? The customer is usually only concerned with convenience – can you be more convenient?
No goals set
No goals means no direction and we all know what happens to a headless chicken.
When creating goals make sure they are SMART. SMART goals are:
- Specific
- Measurable
- Actionable
- Realistic
- Timely
Break your goals into projects and projects into tasks – it is now manageable. You have a plan with actions, costs and time which can be easily understood and your goals now have substance.
To have direction, in addition to your goals, ensure that you have a Vision Statement and a Mission Statement. These are not fluffy verbiage, done properly they will add direction to your goals and decisions.
You can measure all decisions against your Vision Statement, Mission Statement and written down goals.
Not Monitoring Business Performance
Your Key Performance Indicators and Metrics are best known as “the numbers”. To succeed, you must identify your key “numbers” and monitor them. You will create and monitor around 30 numbers per period. Ensure that they are calculated the same way each time.
A number like “Total Sales” is a vanity metric, particularly if a product costs more to produce than you are selling it for. Something like “Net Sales Contribution” which is the Total Sales less Cost of Sales less Cost of Production – money you get to pocket from sales for the month is far more valuable. Another vanity number is the difference in the bank balance between this month and last month as it does not tell the full story. Keep your numbers “hard” and tell a full story. Ratios are great as the numbers will vary between years – they remove the effects of inflation. Ratios like “profit over costs” can give you a leading indicator. Most “numbers” are trailing indicators.
How many times have you seen large businesses reporting figures like $50B sales with an overall loss of $3B. Somebody is not doing their homework.
Now that you have identified your primary number and 7 main numbers you can start to manage the business by the numbers with real information.
To skip monitoring your numbers is to risk a serious set of misjudgements leading to failure. The numbers may be uncomfortable at times but when well chosen they tell the truth of the business.
A Lack of Passion for the Business
Passion is what powers a business and it is contagious.
Management sets the tone for a business. If the management has no drive, is manipulative, lazy and greedy, then people with matching attributes are the only ones to stay. The rest will leave or be asked to leave.
If the people are lackluster and have little drive – the business cannot hope to succeed due to inefficiency. They are watching the clock for the daily sprint to the car and have no interest in the quality of the product.
Instead, if the management is passionate and driven, they will inspire the lower ranks to higher performance. All will put in the extra time needed to finish the day’s tasks. The tasks will be completed properly because they want to help their business. Morale will be high and work will be a pleasant place. People will want to spent a third of their life at your place.
To gain this level of loyalty you must pay well and show respect to your people.
Profit sharing is a good place to start.
Inflexibility
To be nimble is the biggest advantage of a small business. Because the business is small, it can adapt to changing circumstances quickly.
If the management team are unwilling to learn new skills and change their processes the business is at risk of being damaged by adverse circumstances.
The opinion that “this is the way it is done because this is the way it has always been done” is doomed to rapid failure.
We are undergoing a period of rapid change. Having just left the Information age, we are now entering a period of rapid social change. Six months is now a long time and trends are starting, running and finishing very quickly. These are not fads, the changes are with us for keeps. We just get to understand the new rules in one sector and another change is upon us in another sector.
Look at the damage that Electric Cars are doing to the traditional ICE (Internal Combustion Engine) vehicle manufacturers. They are too slow to react. They have more than a thousand component manufacturers providing them parts to assemble. A standard Toyota car has more than 500 different electronic subsystems (cruise control, ABS etc) built by 130 manufacturers. Each subsystems is a small computer with its own software. They are subject to many recalls because 500 system’s hardware and software must change in unison without error – not happening.
The problem is not the technology, it is the business model.
Traditional car manufacturers are manufacturers in name only – in truth they are assemblers. People like Elon Musk are creating enormous vertically integrated businesses. They write all of their own software for their own design of chip and have the ability to react quickly.
Ford is hurting world wide, General Motors has maybe 12 months left. VW is rolling only from inertia.
The lesson here is to keep your business model current and be nimble. Embrace change and leave the dinosaurs to fall by the wayside. Dinosaurs come in all sizes.
Poor Idea / Poor Implementation
Sometimes a business will fail due to a poor idea or poor implementation.
The idea should have been validated during the Business Model or Business Planning stage. The implementation is reliant upon the Business Plan. That is why these documents exist.
Keep a close eye on the KPIs and Metrics in comparison with the projected figures in the Business Plan. Any discrepancy will warn you of implementation errors. It could be that the plan is dodgy or out of date. Judgement is required, but I would suggest revisiting the plan and associated documents to check the project before disaster occurs.
An expensive implementation can run down your allotted finances and leave you short on operating capital.
Failure to Plan
“To fail to plan is to plan to fail”. Another way of saying this is “Prior planning prevents poor performance“. Sounds trite but both are so very true.
The whole concept is to have the systems worked out in advance of their use. They will provide guidance and the expected direction for the business down the track.
Failure to complete any of the plans will lead a business to making uninformed and unresearched decisions which are likely to be incompatible with previous decisions.
When a well thought out plan is created, it is integrated between functions and will better manage all processes. The most important purpose of planning is to have everyone on the same page and understanding who is doing what, why and when.
Business Model
A business model describes how an organization creates, delivers, and captures value, in economic, social, cultural and other contexts.
The Lean Business Model Canvas best defines the operation of a business. It is a one page plan for how the business runs showing its internal and external relationships and structure. This model must be maintained. The world of commerce is changing constantly and quickly. This plan shows how product is created, the money flow and how the product is distributed. It further shows the relationship between the business and the customer base.
It will assist management to overcome customer inertia by defining the distribution channel.
Business Plan
A detailed plan setting out the objectives of a business, the strategy and tactics planned to achieve them, and the expected income, costs and profits over a period of five plus years.
This expands the Business Model document and includes:
- Proposed Structure
- Projected Cashflow
- Projected P&L
- Marketing Summary
- Sales Summary
- Staged Human Resources requirements
- Implementation
Marketing Plan
If the marketing plan is not created, there is a hole in the communications between Marketing, Production, Sales and Management. A typical Marketing Plan contains:
- Customer Analysis
- Competition Analysis
- Location Analysis
- Product Comparison
- Marketing methods and direction
- Lead Generation
Sales Plan
If Sales are not standardised, you are left with whatever falls out of a salesman’s mouth at the time for that customer. This is not likely to provide a good result and makes follow-up by another salesman difficult.
A Sales plan defines the approach taken by the Sales team. It will include:
- Lead Mechanisms
- Customer Selection
- Standardised Sales Steps
- Standardised Sales Scripts
These can be tested and tuned to provide a more efficient and uniform method globally.
Scaling Plan
Customer Service Plan
Keeping your customers happy is your primary concern when growing a business.
Your Customer Service Plan will cover all of the aspects of the customer interface – procedures and scripts.
Failure to provide a simple and well executed customer interface can cause difficulties. It is often not the problem that the customer reports, it is the way you handle it. Calling a customer stupid because they cannot manage a simple mechanism is not going to win friends and influence people. My suggestion is that this is one of the two areas of the business to obsess over (the other is the numbers). An online interface may be simple to you but too complex or not relevant to the needs of some users.
Continually seek to test, measure and improve all aspects of the customer interface. This is one area where great dividends are paid by making things better, quicker and more friendly.
Disaster Recovery Plan
All is going swimmingly then you strike a reef. You may either open the book and read your detailed preplanned response or run around with your hair on fire putting out small grass fires everywhere and not have time to address the main problem. These things never strike one at a time – they always have friends.
Be careful here as sometimes these incidents come with damage or injury. They can go legal in the blink of an eye in which case you need all bases covered as well as properly documented procedures and logs. You are dealing with staff, visitors and Government types. All like to get their hooks into you.
Wrong Business Partners
Even people you know have aspects to their personality you have not yet experienced. They also change over time.
The biggest problem is that after a time, the vision of the business partners begins to differ. One partner sees it going one way and the other going a different way. Since they are both deeply involved, the differences can become quite visceral. This often leads to either a buyout at a time when you could well do without the expense, or a separation which may be fatal to the business. The other problem is that due to stress, personality quirks begin to niggle with the same result.
If you must have a business partner, look for a partner to “fill in the blanks” in your experience.
If one is a big thinker, the other will provide the detailed aspect of the business. If one is technical, the other can be sales/marketing. This should keep you both too busy to murder the other.
Ensure that your duties and expectations are written down along with the number of shares held. Include the rules for termination of the agreement so that it does not end up in litigation.
An ideal business will have the following skills in its management team:
- The Visionary – sees and communicates the dream
- The Hacker – the technologist knows all and can create the product
- The Magician – sales and marketing genius
- The Enabler – administrator who greases the wheels and makes it all happen
In the early stages, partners will wear more than one hat. When the smoke clears, some of these roles will be passed to high level staff to allow the partners to work on the business instead of in it.
Poor or No business systems
Business systems are documented policies and procedures. Interestingly, a business with comprehensive business system documentation has a higher resale value.
If a business lacks systems, the different procedures will be executed differently each time. This leads to differing tolerances and quality. Different operators, different moods all make for different products. If the difference is found in the administration, it can truly bother customers and mess with the internals of a business.
The benefit of documented systems is a form of standardisation and the opportunity to improve your processes which will lead to better systems over time. The other benefit is that training is reduced as a new person need only read the documentation to complete the task in the standard manner.
Add board and card systems to the mix and your inventory and workflow is improved.
Standard Operating Procedures allow you to create a business that is process dependent which is position based rather than person based.
Multiple people may now fill each role as the work involved is now well described and broken down to simple steps.
This means that you can take short breaks and reasonably expect that things should run well (probably better) without you in attendance. Everybody knows what to do and how to do it without your guidance. This also allows you to work ON the business instead of IN it more. It also frees you to attend seminars or workshops which will further improve the business.
Lack of Vision
I define vision here as the ability to see and feel a business in the future as you would like it to be.
If a manager demonstrates lack of vision, they should be separated from their job soonest. If you are the owner lacking vision, either work hard on developing a vision or find another line of work.
Lack of vision will hamstring the development of any business. Vision provides direction so lacking it will only leave hard work and failure as a result. Improvement without vision is difficult. Vision leads to goals which lead to plans which lead to improvement.
Vision seems to be one of the few things inherent to a person. You either can do it or you can not. The alternative is that you have little interest in the business. This being the case, move to something you are more passionate about.
Lack of Business Acumen
Contrary to popular belief, business acumen can be learned – it is a skill.
Just as an experienced plumber can quickly find a water leak, an experienced businessman can quickly find the money leak. It boils down to knowledge and experience.
The bulk of what is called business acumen is understanding and habitual application of correct procedures. There is an intuitive component, but that will improve with use when backed by proper fundamentals.
Your mind tends to pick up on things that you are constantly thinking about – that is how we improve.
Do not see the lack of business acumen as a failing – merely inexperience and lack of learning. Constantly seek to improve and never stop learning.
We all make mistakes but failing fast is how we learn quickest.
Poor Choice of Staff
Hire people who are smart enough to know when they don’t know something, who have the ability to learn, and that want to go on the long journey with you.
Hire people who will make the step to the next level up or even the one above that. The experience they gain with your systems is too valuable an asset to be squandered.
Watch your people, respect and train them as best you can and give them documented procedures to follow.
The old adage of hire slow and fire fast makes a great deal of sense.
If a person has a poor attitude, does not seek to improve himself or his workplace, watches the clock for the mad dash to the car at knock-off he is not providing any value to you or his workmates. You are better to replace him soonest. This does not mean that you do not give him a chance to work out his situation. Remember that the longer he stays, the more he pulls is workmates down to his level and the less he will achieve.
Most people see a job as only appearance money, not a place they spend a full third of their life.
You are looking for the person who will work on the average system – give you time at the end of the day to finish up the task at hand and take a longer lunch later. This person will also be seeking ways to improve their workplace and procedures. In accordance with good practices, when they suggest an improvement, test it or better yet let them test it.
Listening and action goes a long way toward mutual respect.
Micro-Managing Staff
Micro-Managing is an expensive exercise, usually done by those who cannot delegate.
If your staff member cannot perform their duties after a short learning curve, there is no point keeping them.
Consider the old farmer who could understand the speech of his animals. Each day he lingered around the animals to listen and learn. This time he was listening to the ox bewailing his lot to the ass. My legs are tired after pulling the plough all day and my neck is chafed from the bow. The ass was a likeable soul and suggested to the ox that if he did not get to his feet and made a lot of noise in the morning the ploughman would think him ill and give him the day off to recover. When this occurred, the ploughman reported to the farmer that the ox was ill. The farmer said that the fields must be turned, so harness the ass to the plough.
At the end of the day, the ox thanked the ass for his idea and said that he had a very restful day thanks to the idea of the ass. The ass was seriously crabby as he had sore legs, sore back and a chafed neck. He said to the ox that he had done the work of the ox all day. Further, he said that he had heard the farmer telling the ploughman that if the ox again became ill to call the butcher.
The moral of this story is to be careful who you help because you may end up doing their work to the detriment of your own.
You have your duties, they have theirs. If you are continually doing theirs, you are not doing yours. Why pay them to do a job, then do it for them?
Is your staff member incompetent or are you running away from your responsibilities? In any case being micromanaged is a pain in the butt, and is not productive.
Do not keep a dog and bark yourself.
Poor Staff Training
Staff training is one of the important ones.
If your staff are not well trained, they will be unable to perform their duties well. This costs the business due to mistakes and poor quality product.
Induction
- Policies and Procedures
- Company Culture
- Meeting the Team
- Handbooks
Ensure that the materials have been read and understood with all questions answered. They must be work ready on their first day.
Indoctrination
Motivation
Inspiration
Systems
Productivity
Poor Support Team
Your support team should be just that – a support team. Their purpose is to advise you on the professional areas, usually compliance with regulatory bodies. A standard support team will be comprised of:
- Mentor
- Accounting
- Legal
- Insurance
You get what you pay and if you pay peanuts, you get monkeys. Bad advice can be deadly to your business.
Team Communications
I suggest that you authorise your team to communicate directly with each other about your business. This will save you considerable time and reduce mistakes caused by lack of clear communication.
Accounting
Your accountant can save you significant money if he or she does their job well and if they are familiar with your industry. They reduce tax liability but also provide guidance for overall business practice.
The advice component of their services is the most important.
Legal
Your legal advisor can also save you considerable money and angst.
There are always multiple ways to approach any problem – even one as simple as the business structure – do you operate as a private trader, a partnership, or a company. Each has tax and liability (asset protection) aspects.
Often a solicitor’s letter costing $300 can divert a matter with potential for a far greater expense – if it is done well.
Insurance
Insurance is not just getting the cheapest policy – the trick is to tune the coverage to your risk profile.
Ensure that your mountain top house is not paying for flood by rising water but do not skip lightning cover. An insurance professional can help you here, but make sure that you are not fully funding his wife’s BMW. A good one is a real asset and can save you a lot of unnecessary costs but cover your risks properly.
Mentor
A mentor is possibly the most valuable team member. Unfortunately sometimes they do not perform which leaves you as the recipient of bad advice. The quality of the advice is not proportional to the cost of the service. It depends on the ability and integrity of the person.
Poor Focus
There is an old adage which states that “a man cannot chase two rabbits at the same time“.
As an owner, you may broaden your focus only if you have managers to chase rabbits of their own. You need only watch and improve your managers.
Until that time, maintain your business focus and chase your own rabbit exclusively.
Many people starting out, particularly on small farms want to do everything at once – cattle, sheep, pigs, chooks (poultry for non Australian readers), cropping and a full market garden. This will work well if you are able to fit 3 full days work into one and maintain the pace indefinitely.
The only exception that I know to this rule is Elon Musk who is an advanced lifeform – not quite human – much respect.
Document your procedures to massively reduce the amount of supervision needed, then audit to ensure that the procedures are being followed.
The penalty for failure to follow operating procedures is keelhauling.
Inability to Sell
Sales is a necessary skill that can be learned but does need practice and practice takes time. As an owner or manager, you are always selling, if not to customers then selling the vision of the business to your staff.
If you lack the confidence or ability and do not have the time to develop sales skills due to other management commitments, your only available direction is to hire a useful salesman.
As regards the company vision, you will need to rely upon passion and a genuine approach.
Prior to devoting my time to Properly Organic and Designer Acres, I served as a contracted super tech in the bleeding edge of satellite imagery, business management and accounting software, then telecommunication software bringing SMS and Mobile Application Protocol into Australia. I then decided to return to the land. I quickly discovered that apart the shape of the bales and the colour of the tractors little had changed.