The majority of businesses fail before overcoming their infancy stage, consequently this makes it so a vast portion of entrepreneurs are not able to make a career out of their ideas. This may be due to a simple fact that some ideas are simply not worth pursuing; however, sometimes people have good ideas but are completely incapable of properly executing these ideas. To avoid some of these errors and increase one’s own competence in business, it is good to know and acknowledge the reasons why other people fail, so that you do not have to repeat their mistakes.
1. Poor financial management
Whether it be the interest on the loans used to start the business or the overall impact of salaries on any given business, people often have a hard time conceptualizing the ramifications of any given usage of the company’s capital. People get excited when their company starts making money, and this causes them to become complacent. If a business makes half a million it does not grant the executives to then bump their salary by $400,000. This would effectively skyrocket your overhead, and lower the real growth of your business. To not reward yourself seems unappealing after all the hard work that one may have gone through to make the half million, but it is far better in the long run to keep the money in the company so it may be allowed to grow. Most determinately, the business who can keep their overhead lowest will have the largest business advantages against competitors. The lower the overhead, the lower you may charge for your product, which in turn incentivizes people to purchasing from your business over the business of your competitor. To tie this back to salary, it is crucial to minimize the number of employees that must be hired. If a job is possible with two people working extra hours, it is better for the business than to hire a third person. The only time to decide to hire a next person is when tasks become a limiting factor within a company.
2. Poor financial accountability
The non-optimal usage of company capital is not necessarily the fault of the entrepreneur, in fact it is often caused by the employees of an organization. Companies will often give employees a pool of money they can take from when going on a business trip, paying for gas, or getting food. If an employer grants an employee $500 per night to go on a business trip and the employee doesn’t get to keep any of the leftover money, there is then no reason for the employee to try to spend as close to $500 as possible. If they had to choose between a Best Western for $100 per night or a $450 a night to stay at the Ritz, there is no reason for the employee to choose the Best Western unless they actually of a stake in the company. Overall, this is not ideal in the scheme of your business, and overtime this type of mentality and business culture will severely harm your business, especially if you are a small business.
Sometimes, the person who comes up with the business idea, has a great idea, but he does not have the leadership skills required to execute what is required for the business to survive. This is a hard reality for many entrepreneurs to accept, but sometimes it is something that one must acknowledge. After accepting one’s own shortcomings, they have one of two option. One is to learn and improve so that they can become better leaders and managers of their business, the other is to follow the steps of the founders of Apple. The invention of the original Macintosh computer was by a man by the name of Steve Wozniak; however, he has become the far less famous founder of Apple. Although he had all the engineering talent, he lacked the poise and composure to become a leader and face of the company. This resulted in Steve Jobs becoming the CEO of the company, and caused Steve Wozniak to have to pass the reins over to Jobs. Obviously for someone in Wozniak’s position, it is unideal, but in practice, it was the greatest decision that Apple has ever made. It is hard to accept, but if leadership is not your strong suit, and a co-founder is explicitly better at these types of duties it should be something to consider. You can hold shares and seats within the company’s board and point the company in a given direction, but have someone else be the CEO.
4. A lack of differentiation
Assuming you do not start a business in an oligopoly market, when products cannot be easily differentiated, it will cause competition to unfold at the greatest degree. This is very hard for entrepreneurs, and mathematically is responsible for the largest number of businesses’ insolvencies. Let’s say you have 100 Italian restaurants within a one mile radius. Which one will the customers pick? Obviously not all 100 will be picked uniformly at the same rate. The bad ones will get 0 customers, the great ones will always be packed, and the largest portion, the mediocre ones, will slowly thin out eventually leaving one or two of them. Most businesses are categorized as one of these mediocre institutions. The hardest, but simplest way to solve this issue is to no longer be mediocre. If all the business is working on an 8 hour shifts and 40 hour work weeks, the business who decides to make themselves better by working 9 hours with a 45 hour work week will simply distinguish themselves thus making their business more desirable. If there are three gas stations on the same block, and one of them is selling their product 10 cents cheaper, it will attract more customers to it, thus differentiating it to customers as the superior shop to conduct business with. In summation, to truly survive in a competitive market, one of two things must be done: objectively prove your product to be superior or sell it cheaper than the next person.
5. A lack of capital
Sometimes this problem roots itself in a business’s inability to attract investors. There is a given threshold of capital that is required for a business to be able to start up. In terms of accruing capital, it is far better to overestimate the amount that is needed than to underestimate that amount. If your company lacks capital it will make it very difficult to grow the business, and it will greatly jeopardize day-to-day operations. Nobody operating a business really plans to fail, but businesses will always run into roadblocks and it is a very good idea to have a back up plan for when that happens, thus a surplus of capital should be saved for rainy days.
6. Macroeconomic factors
This is an issue that will occur to a business from time to time, which as previously stated, can be minimized by holding extra capital. Macroeconomic factors are out of the control of the business owner, but it is something that people should always take account for to the best of their ability. When the housing crisis hit in 2008, a lot of businesses went under, and that was to no fault of business owners; however, there are other cases that are preventable. When policies on the hill are being made, business owners should do their best to pay attention to them so that they can properly plan for the future. For example, when the Affordable Care Act went through, businesses that were planning ahead lowered the hours of their full time employees in order to save costs from skyrocketing and consequently business failure. Businesses that deal with importation of Chinese products, must currently have a contingency plan for in the case in which America removes their China from the “Most Favored Country Clause” and the goods must face large import taxes. Lastly, keeping track of what the federal reserve is doing can give you a large edge in business conduct. Knowing the value of the dollar and how its value will change (inflation) in respect to interest, can better help businesses make decisions on how/when to borrow money; along with, when refinancing certain aspects of a business is ideal.
7. Lack of flexibility and vision
Markets are constantly changing, and businesses must adapt to it. Many business failures are due to businesses being too static and not changing as times change. The most prominent case of this in recently history is the mass bankruptcy of dvd distribution companies. It’s not as though they were incapable of providing the services now offered by Netflix and Redbox, the issue was that they did not change their business fast enough. The current trend is the shift from brick-and-mortar to e-commerce. Omitting e-commerce lowers a company’s ability to compete in market share acquisition. Another big trend is the adaptation of membership systems and more significantly, paid membership systems. This idea is rooted in the fact that returning customers are the most valuable type of customers to a business. This being said, it should be the duty of current business orders to try to adapt a membership type program as part of their business model. These are just examples of modern business developments that entrepreneurs should have the flexibility to implement in their business conduct.
8. Uncontrolled growth
It seems a bit counter intuitive, but this has been backed by several case studies. Secure growth that can be predicted and measured is far safer for a business than growth that occurs in hikes and jumps. Without the proper amount of capital, too much business can destroy your company. When expanding at high rates, you will amass substantial up-front costs to finance enormous inventories to meet the demands of new customers. Without a nest egg, you are taking a lot of risk absorbing a lot of cost as there is never a guarantee that the new business that you are receiving is sustainable. Let’s say you currently sell 10 million units per year of a given product, but a large company comes to you offering you a deal to sell them 40 million units this year. Business owners will often be very excited about this and jump on the deal immediately; however, there are a bunch of things that people do not take account for. How do you know for certain that a net 50 million units will sell through in one year? How do you know that your company will continue to grow after this jump – without continued growth what is preventing your investors from deciding that it is not worth staying? If that company decides to only buy 20 million units the following year, what are you going to do with the factories and manufacturing facilities that you invested in to produce a 40 million unit order, and are you then planning to fire half your workers because they will not have any work to do? Ultimately, if you take on huge percentages of growth, you are spiking your liabilities significantly against your capital. Before deciding to incur these liabilities, be very aware of the risk you are taking, as this single project can destroy your company.
9. Varied Core Values
When your company is just starting, you must make sure the values and goals of the founders/executives are relatively uniform. Without a decisive direction for the company, infighting is sure to occur. This is something that will easily cause investors to leave. At larger companies, infighting is not particularly detrimental, but if this happens before the company’s culture, core values, mission, etc … are established, the company begins to survive on borrowed time. Core values is something that business partners should establish before fully investing into their business. If one person wants the company to go through path A and the other path B, either someone needs to give in, or someone will break apart from the company. Realistically, the core values and foundation of a company must be firmly constructed before building upon it.