Businesses are at their most vulnerable during their first five years of operation. We examine the most common reasons for their failure…
1. Why businesses fail in the start-up phase
“The reasons for start-up failure aren’t a mystery,” says Robert Buys, senior manager in Seda’s Enterprise Development Division. “It usually comes down to one of four factors: starting for the wrong reasons, not enough research, lack of knowledge or skills and insufficient access to networks and mentorship. Insufficient capital, bad management, wrong location, poor marketing etc. are all just symptoms of these. Good management and marketing are essential when starting up.”
Starting for the wrong reasons
According to Buys, if you start a business for the wrong reasons, it is likely to fail. Starting out simply to make money, gain spare time to spend with family or answer to no one but yourself, is dangerous. “You need to have a passion for the industry that you are going into to sustain you through the tough times, so don’t go into business for the wrong reasons,” explains Buys.
Simply copying somebody else’s idea also doesn’t work, even if it worked for them. In many cases, the owner is the business. Moreover, without his personality or skill set there is little chance that you will be able to emulate his success.
Businesses started by desperate people who have lost their jobs and need to make money fast, are also at risk of failure. It will take time to gain some return on your efforts, so you need to be committed for the long-term and have “heart” to succeed.
Not enough research
Many small businesses fail because of fundamental shortcomings in their planning. To be successful, you need to have a sound idea, a purpose (your product or service must fulfil a real need in the marketplace), and a plan that outlines where you are going and how you are going to get there. Thorough research is crucial to ensure that you have all the ingredients for success.
A business plan is crucial, even if not required by the financial institutions. Writing a business plan forces you to consider and investigate every aspect of your idea, purpose and plan. The plan must be realistic and based on accurate, up-to-date information and educated projections for the future. The following components should be included:
- · Description of the business, vision, goals, and keys to success
- · Work force needs
- · Potential problems and solutions
- · Financial: capital equipment and supply list, balance sheet, income statement and cash flow analysis, sales and expense forecast
- · Analysis of competition
- · Marketing, advertising and promotional activities
- · Budgeting and managing company growth
Be realistic about your strengths and weaknesses in order to work out what kind of support you will need.
The wrong skill set and lack of knowledge
“Illiteracy in business is another reason for small businesses failure,” says Buys. You may have a good idea for a business but in all the excitement of starting up, you don’t stop to ask if you will really be able to do it. You need passion and energy, but you also need the right skills and product knowledge if you are going to deliver a professional service or sell a quality product.
Before starting up, think about your unique selling point. The differentiator could be superior skills or service or better or cheaper products, but there must be something that makes you special. Without this, you will surely fail.
If your product is not up to standard, clients won’t come back. You must also learn how and where to market your products and services in order to attract the right clientele.
A lack of information can also contribute or lead to failure. Reading business books, magazines, website articles and blogs and talking to other business owners is something that everybody can do to gain knowledge and improve their skills.
Mentorship through organisations such as Seda also offers much-needed support and a source of sector and industry knowledge.
No access to networks
Access to networks is important as they can provide support, inspiration, motivation and a platform to market your business and gain new customers.
“South African business owners don’t have a culture of working together, but would rather suffer in silence,” says Buys. “They should aspire to work together as business owners do in Kenya, Italy, Brazil and the UK.” Networks could include any formal and informal groups. The point is to get your name out there and market your business and services to potential customers, while being supported by fellow entrepreneurs.
2. Why businesses fail during the growth phase
Willie Nortier, COO of specialist investment company Business Partners, says that overtrading is the main reason for failure in growth companies i.e. they are growing faster than their capabilities allow them. While you shouldn’t try to suppress growth, be careful not to over-extend yourself and put the business under unnecessary pressure.
Growing businesses also often need better information management systems than start-ups, explains Nortier. “The systems have to grow with the business. It is easy to keep tabs on things when you are operating on a small scale, but you need to be able to get accurate information to act when necessary in order to succeed.”
Cash flow management is crucial when growing. “You need to match your capitalisation and growth in order to have enough working capital to fulfil your obligations,” explains Nortier. Business owners can come unstuck here, particularly if money is tied up in stock when cash is needed. The lesson here is to grow in line with your financial abilities.
Growing in a market that isn’t sustainable and putting all your eggs in one basket are also best avoided. Don’t gear up based on “expected” orders or for a single big project or client, and never tie yourself into fixed pricing. Tread carefully and make sure your growth strategy is sustainable and adaptable.
“If your success was based on your personal touch, be very careful to grow too fast,” warns Nortier. If expansion means that you stop interacting with customers, it could spell disaster. Quality control is part of this personal touch, and putting the right systems in place is one solution to this problem.
While there are many reasons for business failure, there are just as many strategies to counter problems before they arise. Ask plenty of questions during both the start-up and growth phase so that you can base your decisions on realistic data. And whatever you do, do it for the right reasons and with all your heart.
Published in Your Business Magazine
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