Why do businesses fail?
Aka how to identify warning signs and turnaround your organization
October 2, 2024
About the writer
Dickson Wasake is the COO of Ingram Advisory Group he has over 20 years of experience from over 5 countries including the USA, Canada, the UK, The Bahamas and Uganda. Dickson is a UK qualified CPA (FCCA) and has completed the exam requirement for the US CPA. Follow him on Linkedin.
Businesses everywhere, whether it is Timbuktu, Bandar Seri Begawan or Wichita fail for similar reasons. A respected New York Times Article[i] on the subject gives the top 10 reasons for this business failure as (summarised below):
1. The math just doesn’t work. There is not enough demand for the product or service at a price that will produce a profit for the company.
2. Owners who cannot get out of their own way. They may be stubborn, risk averse, conflict averse.
3. Out-of-control growth.
4. Poor accounting. You cannot be in control of a business if you don’t know what is going on.
5. Lack of a cash cushion.
6. Operational mediocrity. Repeat and referral business is critical for most businesses
7. Operational inefficiencies. Paying too much for rent, labour, and materials
8. Dysfunctional management. Lack of focus, vision, planning, standards and everything else that goes into good management
9. The lack of a succession plan.
10. A declining market.
Who is to blame for business failure?
Now there is something very critical to note about business failure that you will need to pay attention to because this topic of business failure is very interesting. According to a study in an Emerging market[ii], when business owners were asked to give their own reasons for failure, they categorized those reasons as below – pay attention to the categorization of internal and external factors.
External & internal factors/rank
Taxation
Load shedding (electricity)
Lack of capital
Poor market
High rent charges
Wrong pricing
Negative cash flow
Poor record keeping
Domestic and family
Delay in application
IT IS INTERESTING TO NOTE THAT WHILST IN THE NEW YORK TIMES ARTICLE, ALL REASONS FOR FAILURE (EXCEPT No. 10) ARE INTERNAL AND BLAMED ON THE SMALL BUSINESSES THEMSELVES, The owners themselves when asked (in the second study), blame ALL THE TOP 5 REASONS for failure ON EXTERNAL FACTORS.
The author of the New York Times article rightly points out:
“One of the least understood aspects of entrepreneurship is why small businesses fail, and there’s a simple reason for the confusion: Most of the evidence comes from the entrepreneurs themselves….from my observation, the reasons for failure cited by the owners are frequently off point, which kind of makes sense when you think about it. If the owners really knew what they were doing wrong, they might have been able to fix the problem. Often, it’s simply a matter of denial or of not knowing what you don’t know.”
What our experience with business failure often shows is that the owners – don’t know what they don’t know and that is why dealing with business failure and hence helping to turnaround a failing business is best done by an external party.
The story of an air time scratcher invention
To demonstrate the business owners often don’t know what they don’t know or are blinded, I will give you a true story. So when you want to create a new product, the starting point is really the market, right? Will there be a market for your product? I was however once approached by someone who said he had a brilliant business idea and he wanted my advice. This was the idea: An Airtime Scratcher Device.
He explained to me the idea as follows in summary: “Scratching an Airtime Card with human nails has always been challenging more especially to ladies. The Airtime Card Scratcher will be in form of, like a Card reader, it will be small, light and portable probably like a key holder. This will enable every person who has a mobile phone buy this device.”
The idea seemed silly but well, who is tell, an idea is an idea and I couldn’t discredit the gentleman. I therefore replied thus:
“Whilst people might want a machine that will help them to scratch the panel for airtime, the challenge here is, would they actually pay for the machine? If so, how much would they pay? The alternative to scratching airtime cards with a machine is scratching with a money coin and so for your machine and idea to be viable, it would need to be sold for cheaper than the lowest denomination coin that can be used.”
This gentleman had spent enough time to analyze his product and to conclude it was brilliant BUT when he spoke to me, I showed him an alternative – which means without this insight, he would have wondered why he was failing, yet it was obvious.
The starting point therefore is to determine if there is a credible market for your concept and then once you are certain of it, develop your vision to do it better than the competition and voila, success, even if it is an airtime scratcher device!
Bringing it all together (aka what it means for you)
How do you turn the rest of the causes of business failure round so that you don’t fail yourself?
Knowledge is power I was told when young so what you do is use the knowledge of failure to “failure proof” your business for example:
If you don’t know how big your market is – consider finding an expert to do market research and then do forecasting.
If you are at risk of being rigid – consider finding thought leadership sources of information to help challenge your thinking. Find mentors, business advisors and others who you can speak with candidly.
If you are dealing with out of control growth – Work with a professional such as a CPA or a fractional CFO to help you undertake cash flow forecasting to assess your future needs.
If you have poor accounting – similar to item 3, work with a professional such as a bookkeeper, accountant, CPA or a fractional CFO to ensure you have regular management accounts and other books and records.
Lack of a cash cushion – Consider what alternative sources of finance you could assess. Might you need to work with a professional to prepare you for how to access this?
These are just examples, see how knowing can help to protect you? IAG can help you ensure that you will not fail and if you are struggling, our restructuring and turnaround offering can be of use to you. Alternatively see case studies of others we have helped.
We are ready to help you, are you READY?
[i] http://boss.blogs.nytimes.com/2011/01/05/top-10-reasons-small-businesses-fail/?_r=0
[ii] http://www.africa.ufl.edu/asq/v8/v8i4a3.htm
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