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Why some companies fail

Sep 27, 2011 2:33:55 PM - www.ft.lk

Did you know that your problems today come out of your solution yesterday? So, one cannot use the principles of yesteryear to manage the success of a business in this year. This, perhaps, is one reason why family-run businesses are moving towards professionalism and constantly emulate multinationals.

When you’re starting a new business, the last thing you want to focus on is failure. But if you address the common reasons for failure upfront, you’ll be much less likely to fall victim to them yourself. Here are the top seven reasons why businesses fail and tips for avoiding them.
According to statistics published by the Small Business Administration (SBA), seven out of 10 new employer establishments survive at least two years and 51 per cent survive at least five years. This is a far cry from the previous long-held belief that 50 per cent of businesses fail in the first year and 95 per cent fail within five years.
Seven pitfalls of business failure and how to avoid them:
1. You start your business for the wrong reasons
Would the sole reason you would be starting your own business be that you would want to make a lot of money? Do you think that if you had your own business that you’d have more time with your family? Or maybe that you wouldn’t have to answer to anyone else? If so, you’d better think again.
On the other hand, if you start your business for these reasons, you’ll have a better chance at entrepreneurial success:

  • You have a passion and love for what you’ll be doing, and strongly believe – based on educated study and investigation – that your product or service would fulfil a real need in the marketplace.
  • You are physically fit and possess the needed mental stamina to withstand potential challenges. Often overlooked, less-than-robust health has been responsible for more than a few bankruptcies.
  • You have drive, determination, patience and a positive attitude. When others throw in the towel, you are more determined than ever.
  • Failures don’t defeat you. You learn from your mistakes, and use these lessons to succeed the next time around. Studies of successful business owners showed they attributed much of their success to “building on earlier failures;” on using failures as a “learning process.”
  • You thrive on independence, and are skilled at taking charge when a creative or intelligent solution is needed. This is especially important when under strict time constraints.
  • You like – if not love – your fellow man, and show this in your honesty, integrity, and interactions with others. You get along with and can deal with all different types of individuals.

2. Poor management
Many a report on business failures cites poor management as the number one reason for failure. New business owners frequently lack relevant business and management expertise in areas such as finance, purchasing, selling, production, and hiring and managing employees. Unless they recognise what they don’t do well, and seek help, business owners may soon face disaster. They must also be educated and alert to fraud, and put into place measures to avoid it.
Neglect of a business can also be its downfall. Care must be taken to regularly study, organise, plan and control all activities of its operations. This includes the continuing study of market research and customer data, an area which may be more prone to disregard once a business has been established.
A successful manager is also a good leader who creates a work climate that encourages productivity. He or she has a skill at hiring competent people, training them and is able to delegate. A good leader is also skilled at strategic thinking, able to make a vision a reality, and able to confront change, make transitions, and envision new possibilities for the future.
3. Insufficient capital
A common fatal mistake for many failed businesses is having insufficient operating funds. Business owners underestimate how much money is needed and they are forced to close before they even have had a fair chance to succeed. They also may have an unrealistic expectation of incoming revenues from sales.
It is imperative to ascertain how much money your business will require; not only the costs of starting, but the costs of staying in business. It is important to take into consideration that many businesses take a year or two to get going. This means you will need enough funds to cover all costs until sales can eventually pay for these costs. Neglect working capital and you neglect the operational efficiency of the start-up operation and what is more, get into bad credit lines with banks and vendors.
4. Location, location, location
Your college professor was right – location is critical to the success of your business. Whereas a good location may enable a struggling business to ultimately survive and thrive, a bad location could spell disaster to even the best-managed enterprise. Some factors to consider:

  • Where your customers are
  • Traffic, accessibility, parking and lighting
  • Location of competitors
  • Condition and safety of building
  • Local incentive programs for business start-ups in specific targeted areas
  • The history, community flavour and recep  tiveness to a new business at a prospective site

5. Lack of planning
Anyone who has ever been in charge of a successful major event knows that were it not for their careful, methodical, strategic planning – and hard work – success would not have followed. The same could be said of most business successes.
It is critical for all businesses to have a business plan. Many small businesses fail because of fundamental shortcomings in their business planning. It must be realistic and based on accurate, current information and educated projections for the future.
Components may include:

  • Description of the business, vision, goals, and keys to success
  • Work force needs
  • Potential problems and solutions
  • Financial: capital equipment and supply list, balance sheet, income statement and cash flow analysis, sales and expense forecast
  • Analysis of competition
  • Marketing, advertising and promotional activities
  • Budgeting and managing company growth

In addition, most bankers request a business plan if you are seeking to secure addition capital for your company.
6. Overexpansion
A leading cause of business failure, overexpansion often happens when business owners confuse success with how fast they can expand their business. A focus on slow and steady growth is optimum. Many a bankruptcy has been caused by rapidly expanding companies.
At the same time, you do not want to repress growth. Once you have an established solid customer base and a good cash flow, let your success help you set the right measured pace. Some indications that an expansion may be warranted include the inability to fill customer needs in a timely basis, and employees having difficulty keeping up with production demands.
If expansion is warranted after careful review, research and analysis, identify what and who you need to add in order for your business to grow. Then with the right systems and people in place, you can focus on the growth of your business, not on doing everything in it yourself.
7. No website
Simply put, if you have a business today, you need a website. Period. In the US alone, the number of internet users (approximately 77 per cent of the population) and e-commerce sales ($ 165.4 billion in 2010, according to the US Department of Commerce) continue to rise and are expected to increase with each passing year. Here in Sri Lanka, more and more companies are gearing into viral campaigning and e-promotions. The Face book and the internet have become strong tools for business inter-links.
At the very least, every business should have a professional looking and well-designed website that enables users to easily find out about their business and how to avail them of their products and services. Later, additional ways to generate revenue on the website can be added; i.e., selling ad space, drop-shipping products, or recommending affiliate products.
Remember, if you don’t have a website, you’ll most likely be losing business to those that do. And make sure that website makes your business look good, not bad – you want to increase revenues, not decrease them. When it comes to the success of any new business, you – the business owner – are ultimately the “secret” to your success. For many successful business owners, failure was never an option. Armed with drive, determination, and a positive mindset, these individuals view any setback as only an opportunity to learn and grow. Most self-made millionaires possess average intelligence. What sets them apart is their openness to new knowledge and their willingness to learn whatever it takes to succeed.
In 1989 Richard Lester and the researchers at the MIT identified seven “best practices” and concluded that firms must accelerate the shift away from the mass production of low cost standardised products.
The seven areas of best practice were:

  • Simultaneous continuous improvement in cost, quality, service, and product innovation
  • Breaking down organisational barriers between departments
  • Eliminating layers of management creating flatter organisational hierarchies.
  • Closer relationships with customers and suppliers
  • Intelligent use of new technology
  • Global focus
  • Improving human resource skills

Most or all of these factors apply very aptly to current business practices. We see the current KPIs focus very smartly on factors covering the seven bullet points above. According to Mark Stevens, author of ‘Your Marketing Sucks’ and CEO of MSCO there are four fundamental reasons why companies fail.
1. Lack of leadership
According to Stevens, real leaders set an example, reward employees and terminate swiftly. “Set the example yourself,” he says. “At my company, I tell my employees to give me homework. This shows them that their leader is willing to do the work to make the company exceptional, not just the job of a CEO.” Leaders also reward high performing team members, he says.
2. Complacency
While several companies have struggled over the last two years due to the economic downturn, others have stayed afloat and even thrived. What gives? According to Stevens, the companies still standing have flourished because they never showed signs of complacency when things were going well. Instead, they pushed and worked hard regardless of the health of the stock market.
“I see companies that were doing really well before 2008 because there was simply enough business to go around,” Stevens says. “They got lazy, didn’t do marketing, and assumed it would always be that way. Then, when things got bad, they had to close up shop.” In addition to a lack of complacency, the key to staying in business is “thrilling customers” and working hard on a consistent basis, Stevens says.
3. Hot and cold customer treatment
Stevens calls this the “lust to lax syndrome.” This is when a business wines and dines its potential customers, but upon signing of a contract, the client is put on the back burner. Not a good idea.
“They are just put into the ‘customer’ file,” Stevens says. “Then, business owners move on to the next lusting experience. No one wants to be a customer; they really want to be a family member.”
This is where small businesses have an advantage, Stevens says. “Let’s say you sell someone a dish set. After they take it home, send them a card that says, ‘I hope you enjoy a million happy meals on these plates’ and I guarantee that person will come back to your store.”
4. Conventional thinking
Remember a few years back when ‘The Rules: Time-tested Secrets for Capturing the Heart of Mr. Right’ came out? I can’t tell you how many of my single friends ran out to the bookstore to read every word. They followed each of the ‘rules’ to a T and… many of them are still single. This lesson also applies to business. “There is definitely a set of concepts that are accepted as the gospel of how to do business; but if you really look at them, many of them are simply not true,” he says. “You really need to look at yourself and ask, ‘What is the wisest thing to do in my business for my team members and for my clients?’”
For example, Stevens doesn’t believe that persons with high seniority should always be paid the most. “That is ridiculous,” he says. “What if a younger person is a star?” In addition, he doesn’t believe in waiting for a consensus. “Everyone has to fall behind the leader… period.”
“There are thousands of ways people view business, not because they have determined it to be the right way for their company, but because it is the way they were taught in school,” says Stevens. ”Always ask yourself why. ‘Why’ is the most powerful word in business. If you put yourself up to the ‘why test,’ you will change many of the things you do.”
Most companies fail. It’s an unsettling fact for bright-eyed entrepreneurs, but old news to start-up veterans. But here’s the good news: Experienced entrepreneurs know that running a company that eventually fails can actually help a career, but only if the executives are willing to view failure as a potential for improvement.
The statistics are disheartening no matter how an entrepreneur defines failure. If failure means liquidating all assets, with investors losing most or all the money they put into the company, then the failure rate for start-ups is 30 to 40 per cent, according to Shikhar Ghosh, a senior lecturer at Harvard Business School who has held top executive positions at some eight technology-based start-ups. If failure refers to failing to see the projected return on investment, then the failure rate is 70 to 80 per cent. And if failure is defined as declaring a projection and then falling short of meeting it, then the failure rate is a whopping 90 to 95 per cent.  “Very few companies achieve their initial projections,” says Ghosh. “Failure is the norm.”
Why start-ups fail
Start-ups often fail because founders and investors neglect to look before they leap, surging forward with plans without taking the time to realise that the base assumption of the business plan is wrong. They believe they can predict the future, rather than try to create a future with their customers. Entrepreneurs tend to be single-minded with their strategies — wanting the venture to be all about the technology or all about the sales, without taking time to form a balanced plan.
(The writer is the Managing Director and CEO, McQuire Rens Group of Companies. He has held regional responsibilities of two multinational companies of which one was a Fortune 500 company. He carries out consultancy assignments and management training in Dubai, India, Maldives, Singapore, Malaysia and Indonesia. He is a much sought-after business consultant and corporate management trainer in Sri Lanka.)

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