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Key reasons new businesses fail

By Pauline Muindi | May 19th 2021
When setting up your business model, think about building an effective sales funnel. [Courtesy]

Did you know that only half of new businesses survive for the first five years? That’s grim, right? The statistics might be even worse - a Bloomberg research found out that of every 10 businesses, eight will fail within the first 18 months.

Many people who are attracted to the glamour of entrepreneurship tend to dismiss the reality of business failure. But while positive thinking is commendable, ignoring the possibility of failure won’t make it go away. On the contrary, overlooking and ignoring the harsh realities of business ownership is a sure-fire way to become just another statistic.

If you want your start-up to have a real shot at success, there are definitely some things you should be doing, and other things that you shouldn’t be doing. Take note of common reasons small businesses fail and do your best to ensure you don’t make the same mistakes.

1. Failure to deliver any real value

What makes your business unique, what sets it apart from its competitors? If you don’t have a real answer to this question, your business might be heading towards failure. All successful businesses have one thing in common – they prioritise providing real value to their customers/clients.

If your sole goal as an entrepreneur is to get rich quick, you will quickly find yourself at a dead end. Instead, think of how you can offer value to your target audience. For example, everyone can open a barbershop and hire a few skilled barbers. But the entrepreneur who thinks carefully about the kind of services that their clientele might require in that particular barbershop will have an edge over the competition.

Take a good look at the industry and determine what sets your business apart from its competition. How do you conduct business differently? What are others doing better than you? With this in mind, develop a unique, customised service package that presents a strong value proposition. Make sure that your brand messaging, identity, logo, colours and all visible aesthetics are in tandem with your unique value proposition. Investing in value might be quite costly at the outset, but it will pay off handsomely.

2. Leadership failure

As an entrepreneur, you have a team of employees looking up to you as their leader. As you deal with business challenges, you must learn how to manage the people around you, share your vision with them, and draw the best from them. Many newcomers in entrepreneurship are overwhelmed by leadership expectations, which can lead to business failure.

If you have partners or a leadership team, disagreements about how to run the business might also spell doom. Arguing with each other publicly, or giving staff contradictory instructions is not likely to inspire trust and motivate your team. In addition, when you have challenges that require decisiveness, you will be caught up in arguments instead of resolving the issues before they cause significant damage.

The effects of bad leadership will trickle down all the levels of your organisation, including financial management, employee morale, and productivity. Once your business’ productivity starts to suffer, failure is sure to follow.

If you are not confident about your leadership skills, don’t panic. You can develop the skills needed through engaging the right mentors, enrolling for business leadership training, and conducting research on how successful business leaders have handled similar situations.

 3. Unprofitable business model

You might have a good business idea, and all the best intentions and determination to succeed, but if you have an unprofitable business model, you won’t have a sustainable revenue stream. An unprofitable business model might mean that you either break even or make losses. There are many reasons that can make your business unprofitable including setting your prices too low, too much overhead costs, failure to optimise conversions, and poor customer retention.

When setting up your business model, think about building an effective sales funnel that maximises conversions and helps in customer retention. Building a sales funnel requires you to consider your target audience, set up a system to analyse their behaviour, come up with a strategy to capture their attention, and create nurturing campaigns to maintain your connection.

 4. Poor financial management

One of the leading causes of small business failure is poor financial management. In fact, 82 per cent of business failure is rooted in poor cash management, according to a US bank study.

Poor financial management can have you lock up a large sum of your business capital in fixed assets, which might lead to cash flow problems later on. For your business operations to run smoothly, you need to have enough money as working capital. Other than bad cash flow management, financial management woes come from poor budgeting and bookkeeping, insufficient tax preparation, and failing to seek professional advice when needed.

Understandably, most people going into business don’t have the accounting skills required to manage a business’ cash flow, taxes, expenses, and other financial issues. But to have a successful business, you have to know where every penny comes from, where it goes, and how it is helping your business achieve its goals.

This is why it is important to pay for professional accounting services. If you are really strapped for cash, you can also manage your own finances through professional business accounting software – remember to log in all the financial transactions to generate accurate financial statements.

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