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Hitesh Porwal

Certified Executive Coach

9 January2020

Failure is not what you want to think about when you are starting out. However, in order for your business to succeed, you will have to understand the common reasons that lead to small business failure

Before we delve any deeper, sample these stats:

-         According to the Global Entrepreneurship Report, only 20% of new businesses survive the first 10 years of their operations

-         Only 50% of new small businesses make it beyond the first five years of operations

-         And, only a third of them make it past their 10th anniversary

No matter if you are a seasoned owner of your small business or an entrepreneur only starting out, these statistics can be grim. For instance, study reveals that a whopping 90% of Indian start-ups fall face first within five years of inception.

While you might see an element of luck to it, in reality, there are a multitude of reasons that kill small businesses even before they get off the ground.

Read on to know about these seven usual suspects of small business failure:

 

1.      Not knowing exactly who your client hero is

What are most movies made of? A hero who is on a mission to slay the villain, overcome challenges on his way, and ultimately win over the damsel in distress (or the pot of gold). One would be mistaken to think our lives aren’t somewhat similar.

All of us are on a specific mission, having embarked on a particular journey in our lives. While some are on a health trip (where they want to be and remain healthy), some are on a wealth trip (where they want to amass wealth and attain financial freedom).

As a business owner, the trick is to identify the journey your client is on at a given point in time. What are the common challenges they could be facing? More importantly, what can you do to address some of those challenges and seal the gaps?

Ask yourself ‘WHO COULD YOU HELP?’ on ‘WHAT PRIMARY JOURNEY?’, and ‘HOW?’ This essentially translates to what is your target market, what are the needs of that market, and what are you doing to satisfy those needs. It is these three questions that will define your business.

 

 2.      Starting business for the wrong reasons

Often, failure in your business may be tied to the reason you started it in the first place. Do you believe the only upside of having your own business is that you’d be earning a lot of money, more than your salaried peers? Or is it that you’d have more time to spend with your family?

While these are perks that entrepreneurs enjoy after years of hard work, they cannot be central to starting a business.

Instead, the right reason for starting a business should be:

-         Your passion for what you do

-         Your belief that you are on this planet to get a few things done;and

-         The drive to address a gap in the market with your offering.

 

 3.      No market need

This is a classic case of a solution looking out for a problem. An entrepreneur can come up with a product (or service) because he thought it would be clever to do so. However, without conducting sufficient market research, he runs the risk of introducing a product that doesn’t really have a market problem to address.

According to this research, resolving problems that are interesting and in vogue, rather than tackling those that would eventually serve a market need, is the principal reason why most new businesses shut shop, as noted in almost 42% of the cases.

The root problem here is that the entrepreneur fell in love with the idea, more than he fell in love with solving a market need and addressing customers’ pain points.

 

4.      Inefficient management

Failure post-mortems often reveal entrepreneurs lamenting “I wish we had a CMO or a CTO from the start,” or “I wish I had a co-founder to complement my skills.”

Debuting business owners often lack the expertise vital to domains, including finance, production, marketing and hiring of employees. Therefore, it is necessary that you identify the areas where you don’t do well and seek timely help. As a remedy, small business owners can derive the required skill set, hire employees who fit the bill, and outsource work to skilled, competent professionals.

Importantly, neglect is another reason for small business failure that stems from inefficient management. It is imperative that you study, organize and plan the activities that are considered the lifeblood of any business. This includes studying customer data and continuous market research, areas that are prone to neglect once a business establishes itself.

Entrepreneurial success hangs on thinking strategically, embracing necessary changes and envisioning newer possibilities going into the future.That requires a team that has the ability to build and execute a well-thought-out business plan.

 

5.      Lack of reserve capital

Crossing the ‘Valley of Death’ is the Achilles heel for every entrepreneur.

Sufficient operating funds (or the lack of it) can really make or break a small business. Understanding cash flow (different from profits) is critical, as is maintaining capital reserves to tackle unexpected increase in costs or delays in revenues.

In a nutshell, not only will you need to know the costs of starting a small business, but also the costs to let your company thrive in a dog-eat-dog business environment. There can be the off chance that your business takes a couple of years more – than your competition - to really get going. Until then, your own funds will have to pay for a slew of recurring and overhead costs.

 

6.      Overexpansion

While continuous growth is desirable, overexpansion and spending beyond your means is a serious error. Taking on unnecessary overheads or trying too hard to convince anxious investors of your growth can goad you into unrealistic expansion of your business. Burning through your capital before cash flow begins to look up is not a wise idea.

At the same time, you don’t want to suppress growth. Establishing a loyal customer base and having sales generate positive revenues can indicate a time to take your business to the next level of growth. Till then, set feasible goals and expand only as your needs dictate. As a literature aficionado would put it, don’t eat more than you can chew.

 

7.      Poor marketing

If you spend all your capital on product development -- but still don’t manage to captivate your target market -- you have got a big problem at hand. After all, customers cannot do business with you if they don’t know that you exist.

If marketing isn’t your strongest suit, make sure you hire a professional marketing firm that has a measurable success track record.

 

As a parting thought, make sure your product is not mistimed. Keep customer feedback central so that you are not introducing a product your customers don’t have any use of. Stay relevant. That’s because if you don’t take care of your customers, your rivals surely will.