9 out of 10 businesses ultimately fail. I know this is not the best statement to start with but it is the reality. Due to this high business failure rate, this ultimate guide to causes of business failure will guide you as you navigate the competitive and ever-changing business environment.
Many businesses fail in their startup stage. To be precise, 5-6 businesses fail before their first anniversary. Others fail at different levels of the business life-cycle.
If you remember the 2008 global financial crisis, you probably remember the big names of companies that failed in their maturity stage. Remember Lehman Brothers. Who thought that such a big bank can fall?
The point here is that no one is invincible. Any business can fail. Any sleep and slumber can bring a multi-billion dollar business to its knees.
If big companies can fall, small businesses can fall a thousand times more. They are more susceptible and vulnerable to failure.
These reasons can be:
- Systemic causes- Causes that are specific and unique to the business.
- Systematic causes- Causes that affect the entire market.
Reasons for business failure
Here are 37 major reasons why businesses fail. These causes of business failure can be averted, managed, or absorbed. A business may have control over some of them but not all.
1. Lack of entrepreneurial qualities
This is the leading cause of business failure anywhere in the world. When founders lack essential entrepreneurial qualities, the business is bound to fail.
Before anyone becomes an entrepreneur on the outside, they have to become entrepreneurs by the qualities they possess. These qualities are:
- Ability to handle the pressure.
- Long-range planning and vision.
- Decisiveness and initiative.
- Willing to think outside the box.
- Forward or forward mentality.
- Ability to handle rejection.
These entrepreneurial qualities are invaluable to any business.
2. Failure to focus
Focusing on one business at a time is critical to business success.
Many entrepreneurs fail because they try to build multiple businesses at the same time. They divide their energy and attention and none of them succeed.
If you want to build something magnificent, focus on one thing. Let all other sources of income be passive.
3. Poor market research
When starting a business, it is important to do your due diligence. Identify whether your idea is viable and scalable.
There is a high chance that your business idea has been tried somewhere else. Before you start your business, research on what happened to businesses that tried to implement the idea you want to implement.
If they failed, know why they did and avoid it. If they succeeded, know why they did and improve on their ideas.
4. Lack of market orientation
Entrepreneurs are generally over-optimistic and confident. They believe in their idea so much that they fail to consider the market. The fact that the idea seems good to you does not mean that everybody needs it.
The idea of building it and they will come has failed over time. In the new age, businesses should only build what people are ready to demand. This is what market orientation is about.
Identify a need in the market and then design a solution for it. This will increase your chances of success drastically.
If you are selling something people want, you do not need to spend billions trying to market it to them.
5. Not investing in marketing
Investment in marketing will always pay off. Many young businesses rarely invest in marketing. Many founders are busy focusing on products that they forget to push them into the market.
You can have the best product in the world but if it is not accompanied by marketing, it will fail.
As the saying goes, a bad product can succeed with good marketing but a good product cannot succeed without marketing.
Therefore, produce one good product and push it into the market. After the product is established in the market, build another product, and repeat the process.
6. Not focusing on sales
Sales is the lifeblood of any business. Without sales, there can be no revenue. Without revenue, it is just a matter of time before you run out of business.
Having a poor sales strategy and channels is a leading cause of business failure.
- Invest in a good sales team.
- Train them to deliver.
- Accompany sales campaigns with great marketing.
- Let the sales process be seamless.
- Take the products near the people.
- Have a good promotional strategy to back the sales efforts.
If you focus on improving your sales processes, you will never run out of cash.
7. Lack of creativity and innovation
Creativity and innovation are critical to business success. Creativity means coming up with something new while innovation is doing things differently.
These two aspects bring differentiation to any business. As we all know, differentiation is one of the generic business strategies. It gives businesses a competitive advantage without having to spend much on marketing.
With differentiation, customers are ready to pay a premium price for the extra features. You can charge more than your competitors and still get enough demand for your products.
8. Poor business strategy
Different businesses adopt different business strategies. Some of these strategies are obsolete and bring little benefit to the business.
Some business strategies may work in some industries and fail in others. A Ferrari dealer will fail if they try to use lower prices as a strategy. It just does not work.
The people who buy these products are ready to pay anything for a unique product. They are more interested in prestige than price. The more expensive it is, the more they are ready to buy.
Analyze your industry. Know what works and what does not. Improve on what works and be agile moving forward.
9. Lack of financing
This is a major cause of business failure. If a business is poorly financed, it will fail. Business operations need money to undertake.
This challenge is mostly prevalent in startups. Most of them do not have millions in the bank. They are also unable to turn a profit at this stage. This means that they are in a shortage of cash.
Most big business rarely faces this challenge. Most of them have millions in the bank and they can afford to do anything they want.
If money is a problem, increase your sales to increase your revenue. This is the best solution to this challenge.
10. Failure to adopt technology
Technology is mandatory for any business that wishes to survive in this age. Any business that overlooks digital production and marketing will find it hard to survive.
Technology is important in the following ways:
- It is cheap in the long run; this saves on cost.
- Efficiency in business processes.
- Unlike human beings, they can work 24/7.
- Important for global markets.
- Technology is the future.
If you are serious about evading business failure, you need to adopt technology at all levels of your business.
11. Lack of a long term vision
Businesses that lack a vision for the future will find it hard to survive today. A vision is a picture of where you want to be by when.
Many businesses that lack this long term approach will seek short term profits at the expense of long term success. To them, everything is about here and now.
These business owners also give up when things do not work in the short run. The bad news is that things rarely work as expected in the short run.
12. No unique selling proposition (USP)
Every business needs to convince customers why they should buy from them and not from their competition. To do this, they need a USP. This is what separates you from the rest in the market.
Your USP should be:
- Focused on what your customers value.
- Not just a mere slogan.
- Bring a clear cut between you and the competition.
Without a USP, a business will be lost in the marketplace. It will fit in rather than stand out. This is a leading cause of business failure.
13. Lack of a cost strategy
Every business needs to focus on cost. After all, higher costs will always reduce profits. This is not what any manager wants.
To reduce the cost:
- Do not hire more people than you need to.
- Negotiate every purchase.
- Seek cheaper suppliers.
- Embrace technology.
- Get cost-reducing partnerships. E.g. Business processes outsourcing (BPO)
Evaluate all business expenses and seek ways to reduce them. Eliminate what is not necessary.
14. Focusing on products and not people
Many business managers do not realize that they are in the people’s business, not the products’ business. This is why they focus on the product and ignore the people.
Without people, even a good product will be in vain. Focus on developing good business partners, loyal customers, great employees, and prosperous society.
In return, people will reward you by purchasing your products and preaching about them. This word of mouth marketing is very effective.
15. Poor pricing
If your product is poorly priced, it will affect your sales. Customers can evaluate when a product is overpriced or underpriced. Both of them will have an impact on your business.
- An overpriced product will generate less demand. This will affect your sales and revenues.
- An underpriced product will hurt your cash flow or even get despised in the market.
The best strategy is to seek an optimum price. Let it be low enough for customers to afford and high enough to imply value.
16. No mission statement
A mission statement expresses the purpose or aim of a business. It tells stakeholders why you exist.
A good mission statement has the following qualities:
- It is super specific to keep people on track.
- A good mission statement motivates the employees to keep working on the goal.
- It rises above profits. The statement is more concerned about making a difference in society.
- It informs the making of business decisions.
A mission statement should be easy to understand for all. Businesses should endeavor to fulfill their purpose as stated in the mission statement. When they divert, they are doomed to fail.
17. Lack of proper values
Lack of firm values is a recipe for business failure. Values communicate what you can do and not do. They represent the integrity of a business.
Business values are not just supposed to be a formal list but ideals that the business follows to the letter. Every business decision should be weighed on this balance.
18. Lack of financial education
Finances are an integral part of any business. After all, businesses exist to make profits by solving the needs of humanity.
Many managers make very poor financial decisions due to financial illiteracy. A manager should be able to read numbers in financial statements and understand the story behind them.
Understanding investment concepts is also crucial to business success.
19. Poor bookkeeping
Financial data should be tracked and organized in a way that is helpful to the business. This data is important in the following ways:
- It should inform the decisions of managers at all levels.
- Important when seeking investors.
- Used to apply for business loans.
- Important for tax administration and reporting.
- The financial trends show where the business is headed.
Financial statements like balance sheets and statements of financial positions, trial balance, various ratios, and cash flow statements are important for any business that seeks to avoid business failure.
20. Poor managerial skills
Prudent management of business resources is crucial to business success. A poor manager will not increase shareholder value while a good one will grow whatever is entrusted to him.
Management entails the following:
- Financial management.
- Business processes management.
- Human resource management.
- Information systems management.
- Strategic management.
Businesses should endeavor to have good managers at all levels of the business. A good manager is worth more than 20 bad ones.
21. Poor leadership skills
This is a major cause of business failure. Many managers are poor leaders. They suck when it comes to relating to people. They are unable to influence people to follow a certain direction.
A person can be good at managing systems and never people. Such should never be placed at the helm of any business unit. Let them work as assistants and never the head.
A good leader should:
- Lead by example.
- Lead by influence and not fear.
- Grow their teams and leave them better than they found them.
- Delegate responsibilities effectively.
- Get results.
Without good leaders, employees will always come and go. This is not good for any business.
22. Having the wrong team
You may have a good idea but lack the right team to implement the idea. A good team consists of good shareholders, executives, managers, employees, and even partners and suppliers.
When you assign a job to the wrong person, they end up reaping failure. This is why managers should be very careful when hiring. One bad employee can ruin an entire company or department. One good employee is invaluable to any business.
23. Poor demand
It does not matter what you are selling, if your customers are broke or unwilling to buy from you, you may never sell anything.
Demand is defined by two things:
- Ability to buy.
- Willing to buy.
Sometimes, some circumstances reduce the ability of people to buy a product or their will.
Economic recessions may be a good example. During recessions, people have no money in their pockets to demand products.
If there are many cases of fraud in an industry or a company, people may be less willing to demand their products.
24. Ignoring the competition
Your competition is your enemy in business. They end up taking your customers and associated revenue.
You should never ignore your competition. Keep an eye on what they are doing and improve it. Do it 10 times better than them. If you ignore them, they will push you out of business.
25. Poor implementation
Good strategies need good implementation. If not so, a good strategy may be less useful.
Implementation calls for the right human and financial capital. Without the two, a strategy will remain just that; a strategy.
26. Being absent on the internet
The internet is affecting every business. There are around 4.5 billion people on the internet today. No business can afford to waste an opportunity to market themselves to such a big number of people.
The following are important:
- Have a great website that serves your purpose.
- Focus on search engine optimization (SEO).
- Let the website have value for visiting potential clients.
- Let it be fast and easy to navigate.
- Market the website.
- Have a clear call to action on every page.
The internet will continue becoming more useful and relevant as many people join in. Make a move today to avoid future business failure.
27. Not using social media
Social media is also here and growing. With over 2 billion people on Facebook every month, 330 million on Twitter, 300 million on LinkedIn, and so on, no business can afford to ignore social media.
It is important to have a good social media strategy. Focus on a few social media sites and grow your following. It is free and very effective if done the right way.
28. Lack of social support
Sometimes, entrepreneurs lack support from the people around them. Their spouses may be against the idea of running the businesses and will do everything to make it fail.
Most of the time, they will be discouraged by family and friends. Some may give in and give up. This leads to business failure.
29. Poor government regulations
Some governments come up with very retrogressive policies. These policies may destroy the business ecosystem and lead to business failure.
Some of the policies include:
- Poor taxation policies.
- Unaffordable registration fees, licenses, and permits.
- Lack of business incentives.
- Not promoting financing to the private sector by borrowing from financial institutions.
These policies ultimately lead to business failure.
30. Poor logistics
If the business environment does not have a developed logistics system, businesses will not survive. This is why the business failure rate is higher in less developed countries.
31. Poor distribution channels
Businesses may not be able to distribute their products by themselves. They may need distributors. This may include chain stores and supermarkets.
If these distributors are not there, many businesses will ultimately fail. This mostly affects startups.
32. Poor inbound marketing strategies
Nowadays, people are bombarded by thousands of advertisements every day. The problem is that they rarely remember even the name of the products that were advertised.
As interruption marketing becomes less popular and effective, inbound marketing is taking over. This entails giving value to potential customers and attracting them to your sales funnel.
Inbound marketing has many forms but content marketing is the most effective. Give valuable content to your customers and they will be loyal to your brand.
33. Lack of periodic audits and analysis
This is a major cause of business failure. Many managers rarely audit the performance of the business. They rarely analyze the business environment, both internal and external.
Some of the most popular analysis tools are:
- SWOT Analysis
Use these tools and honestly analyze your business.
34. Pandemics and natural calamities
Pandemics and other natural calamities can affect businesses greatly. During this COVID-19 pandemic, the business failure rate has surged.
This is a systematic challenge and there is little we can do about it.
35. Poor mindset
An entrepreneur with a poor mindset will never succeed. A poor mindset has the following qualities:
- It is focused on impossibilities.
- The mindset focuses on not losing rather than winning.
- It visualizes a shortage and never abundance.
- A poor mindset lacks priorities.
- It lacks a sense of self-worth.
If you will succeed in business, your mindset has to change. You have to focus on the possibilities. Focus on winning and leaving a legacy on earth.
36. Not learning
This is a major cause of business failure. The business environment is fast changing. New technologies and ways of doing business are coming every day.
If you stop learning as a business manager, you are setting yourself up for failure. To keep up with the change, you have to keep getting knowledge.
37. Giving up
This is also a major cause of business failure. Many entrepreneurs give up so soon. They quit the business world and go back to formal employment. This is why many startups fail.
Final thoughts on reasons for business failure
There are 37 reasons for business failure. They are the reasons why 90% of businesses fail. If you can avoid all of them, you can avoid failure for your business.
To stand out from the competition, you cannot be like them. You have to do things differently
Founder/ C.E.O- Wealthy Wolves Consulting & Giimark Ltd/ Best-selling Author/ Speaker.