TOP REASONS FOR BUSINESS FAILURE
In the work we do here at Generate we’re lucky to be exposed to so many different businesses. Different models, different products and services, different industries, different management styles and different levels of success. Successful businesses make for interesting case studies, but it’s also interesting to look at the common traits of businesses that, whilst not failing, don’t achieve the levels of greatness that they could potentially achieve with some minor tweaks.
With that in mind, here are our top 5 reasons why businesses might fail to achieve greatness.
1. FAILING TO PLAN
A common problem for SME owners is spending all of their working hours, and many more at home, working IN the business rather than working ON the business. Many of you will have heard that expression and anytime I say it to business owners they’ll give that knowing smile and say that they are all over it and will definitely get into some planning, just not this week because they are slammed, but they definitely will get into it. A year later and we’re having the same conversation.
Why is failing to make plans in your business such a big deal? Presumably you started your business with some kind of goal in mind, some higher power that was drove you to take the risk of going out on your own and I’m willing to bet that goal wasn’t “work 90 hours a week for less than I was getting paid before”. However, when was the last time you reviewed whether or not you were on track to achieving that goal? Let’s say the goal was to earn a good wage and take 8 weeks holidays with the family each year, assuming you haven’t achieved that yet, do you know why you haven’t?
This is where planning comes in. A good business plan will outline the reason the business exists and will then detail strategies that can be implemented to achieve your goals. Regularly reviewing the plan allows you to see what has worked and what hasn’t so you can be constantly adjusting to help ensure you succeed.
Click here to download our free eBook that covers everything about writing efficient business plans.
2. POOR CASH MANAGEMENT
We’ve talked about this in various other posts – failing to manage the cash flow in your business can lead to it’s failure. It’s been reported that two thirds of businesses fail because of cash related issues and the vast majority of those failed not because they were operating at a loss, they were profitable, but they weren’t managing cash properly and they ran out of money. Even if it doesn’t result in you closing the doors, having poor cash management constricts any possibility of growth due to not having the required working capital to implement your growth plans. Marketing plans? New staff members? Bigger offices? Forget about it without proper cash management. Even if you’re going to borrow the funds or get investors in, they will all want to see evidence of solid cash management before they’ll give you a dollar.
Managing cash effectively isn’t complicated, it just requires proper systems to be put in place and for you and your team to stick to them religiously. Make sure you’ve got the following systems covered off at a minimum:
- Cash flow forecasting
- Debtor management
- Client contracts
- Expense approvals
You can grab some more detailed information on cash management for your business here.
3. LACK OF A UNIQUE SELLING PROPOSITION (“USP”)
For every genuinely unique business offering like Uber that comes to market there are hundreds of people opening yet another graphic design agency or accounting firm or bakery or whatever. These businesses are started without any real thought as to what differentiates them from the hundreds of other players in their market that they are now competing against. Failure to differentiate your offering means that your business is likely to get lost in the noise of the marketplace and whilst it may not be doomed to failure, it’s unlikely to ever achieve the success you initially envisaged.
This is where having a unique selling proposition (or “USP”) comes into play. You don’t have to be the next Uber, but what you do have to do is clearly identify what makes your business unique. What is it that makes it stand out from the competition? Before you start thinking that “Oh, the USP is me, there is nobody else like me, clients love me” remember that everyone else that has ever been in your shoes was thinking the same thing. Unfortunately just being ourselves isn’t a USP, so we’ll need to try a little harder here.
The following should help you on your way and I’m primarily thinking of service providers here, but the same logic applies to businesses producing goods.
- An industry niche (e.g. we only service gym owners)
- A product niche (e.g. we’re a design agency, but we only do logos)
- A demographic niche (e.g. we service women over 65 in inner-west Sydney)
What you can see here is that these categories are very specific and suddenly you’re no longer just another insurance broker, now you’re an insurance broker that specialises in dental surgeries. Remember we’re talking about small-medium-sized businesses here and we’re not looking for market share in the same way that a supermarket does. You simply need to identify a USP for your business that sets you apart from the noise of the market. This also has the lovely side effect of making your marketing much simpler – no longer advertising to everyone you’re now just advertising to your target audience.
4. LACK OF CLEAR LEADERSHIP
Most people who start their own business are great at what they do and so they figure they could run their own business doing the same. Most people who start their own business do not have formal management training and many don’t have experience at managing and leading a team.
There is a difference between managing people and leading people. Much has been written on this subject, but simply put, leaders have people that follow them whilst managers have people that work for them.
A good leader is able to create a vision and direction for the business, sell that to their team and then have them deliver on it. However, often what you find is someone who has started a business either lacks vision for their business, or lacks the ability to drive that vision into reality. This lack of vision can cause staff to tune-out and become disinterested because they are unable to see the bigger picture (perhaps because there isn’t one).
The best businesses tend to have someone at the helm that inspires confidence in their team and is able to drive performannce because the team wants to perform rather than has to perform.
Definitely a tricky one to overcome, but the first step to resolving any issue is acknowledging it’s a problem in the first place!
5. THE WRONG PARTNER
Another common problem is being distracted from greatness because you’re spending your time untangling the mess that’s left after a less-than-successful business partnership has come undone. There are many issues involved when a business partnership goes south including:
- Legal disputes
- Tax matters
- Financing cash settlements
- Splitting of clients, staff, property, etc.
- Reputational damage
Not always, but many times this situation could have been avoided if the partners had done a bit more due diligence before getting into bed together in the first place (I suppose that could apply in all areas of life!). Whether it’s a new business venture, taking on a partner or investor in a new business, allowing staff to buy a stake in the business or something else, it’s crucial to the long-term success of the business that you all understand what you’re getting into before signing the contracts. Have a think about the following:
- What are the long-term business goals we all have?
- What are the long-term personal aspirations of the partners?
- What skills do each of you bring to the table?
- How long have you known each other? Do you get along?
- What happens when there is a dispute?
Sure, you’ll have shareholders agreements and the like to deal with some of this, but often when it’s time to dust off the contracts it is already too late to resolve the situation amicably and it’s time for lawyers at 10 paces. Don’t let the success of your business be hindered by getting involved with someone who is not compatible with you and the long term plans you have. Just as with staff – hire slow, fire quick!
Bonus reason Plenty of businesses struggle to focus on what is important because they’ve let the simple matter of compliance fall by the roadside. As a business owner you need to be aware of the legal and tax compliance requirements of your business and make sure you adhere to them. Common problems include shoddy bookkeeping, overdue tax returns and BAS, failing to pay superannuation on time, etc. This is all basic stuff and shouldn’t be something that stops your business from achieving greatness. Get someone to handle it for you so you can focus on the real work!
At Generate we work with a wide variety of clients to help them achieve their business goals and have a good time along the way. We offer a range of services outside of your standard tax & accounting including business coaching, virtual CFO and advisory boards – all of which are tailored to meet the specific needs of each client. If you’d like to have a chat about your business please drop us a line, we’d love to help.