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4 major reasons businesses fail and their solutions

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4 major reasons businesses fail and their solutions

 

Nobody starts a business expecting to fail, but statistics show that only 50% of new businesses survive the first five years.

There are many reasons for this alarming statistic which may not necessarily have anything to do with the economy. I shall identify some of the causes of failure and how entrepreneurs can overcome these obstacles to success.

1. FUNDING

One of the major reasons most businesses fail is inadequate funding. Most entrepreneurs fail to adequately anticipate the financial requirements for starting and running the business and this ultimately kills the potential growth of the business. In addition, business owners sometimes have an unrealistic expectation of revenue and when this fails to materialize the business starts having hiccups.

Solution:

It is essential for the business owner to have a financial plan or forecast which would detail a projection of your capital requirements over a defined period (i.e. monthly, quarterly, yearly or as is deemed fit). It may seem impracticable but knowledge of what you would need in future and your contingency plans would in no small way assist in keeping track of your finances. Having your financial plan documented will also portray your business in good light if you intend to raise finance through investors or banks.

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Armed with the knowledge of the capital needs, business owners must constantly explore alternative ways to ensure liquidity. Examples of alternative financing is the development of credit lines with suppliers, invoice discounting, crowdfunding etc.

2. FINANCIAL MANAGEMENT

It is common for business owners to fail in keeping proper financial records and often mix business finance with personal finance which is a recipe for failure. People start businesses with a dream of making money but do not have the skill to manage the finances when the business eventually starts making money. Ultimately revenue earned is usually not certain and how it was expended is also vague which leads to financial imbalance and eventual collapse.

Solution:

Business Owners need to track the revenue and expenses of the business in order to ascertain where the business stands at any point. Considering the probable lack of skill in generating a profit and loss statement, the business owner can consider engaging on part time basis, an accountant or professional bookkeeper to look over the business books on a regular basis. There are also software’s and apps available to help manage this process.

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3. UNHEALTHY PARTNERSHIPS/RELATIONSHIPS

In the frenzy of turning ideas to a viable business, entrepreneurs sometimes enter into wrong partnerships or relationships which have the capacity to sink the business in due course. Choosing the wrong partners,, key employees etc. can become the greatest nightmare of a business and often leads to failure

Solution:

Giving due consideration to the people you do business with is highly important. Where it’s a partnership ensure you have a detailed partnership or shareholders agreement in place and whilst raising finance be wary of giving away too much of the company to investors. Before putting pen to paper ensure you read between the lines of contracts with the aid of a lawyer and be certain you and the other party are on the same page as regards deliverables, timelines, obligations etc.

4. COMPLIANCE ISSUES

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Every Country has requirements for doing business which varies for every sector and it is important for business owners to be familiar with these laws and regulations especially those relevant to their business. Entrepreneurs need to take risks in order to succeed in business and if risks are taken without the required knowledge it becomes a gamble which can spell doom for the fledging concern. A vivid example of a compliance issue is the Lekki Gardens debacle which would have substantially impacted on the company’s growth prospects.

Solution:

Businesses should evaluate all applicable laws and regulations which apply to the business and from inception should have a mind-set of compliance rather than avoidance which brings more issues.

It is advisable to seek assistance from legal professionals who understand the laws and your industry.

These are a few of the reasons businesses fail and whether you desire to start a new business or you’re already running a business, you must understand that success depends on careful strategic planning and control that begin prior to start-up and continue throughout the life of the business.

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