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6 Major Reasons Why Businesses Fail

If you are starting a new business, it is important to understand the reasons why some businesses fail. Despite having an amazing business plan and a hardworking team there is a possibility that the business might fail. Every other day, a new product or service emerges in the market but only a few of them survive. According to data from the Bureau of Labour Statistics, almost 20% of small businesses fail in the first year while 50% fail in the fifth year and about 70% fail by the tenth year. So why do these businesses fail? What are the factors that result in a business failure? Here are 6 reasons for it and how you can overcome them.

1-  The inability to understand your customer:

Not understanding and connecting with your customer means that you are unaware of your customers’ needs and wants. You are not targeting the right demographic, therefore selling your product or service will be challenging. For a business to flourish one needs to connect with the customer so that they know even the minute details about them. For instance, what does your customer need? Or what do they want? Do they want your product at all? Will your product/service solve their problem? If you are unable to answer these questions then the business survival chances are less. So, when you’re starting a business conduct surveys, focus groups, email marketing, or anything that could help you in understanding your niche.

2-  An ineffective business plan:

The first thing when starting a business is to come up with a business plan. It is very different from a business idea: people often confuse the two, which leads to failure. Having a well-structured and accurate business plan is very important.

1.   What is the business about?

2.   What is the vision of your business?

3.   How you can scale it?

These are a few questions that you should ask yourself and communicate to your team for better chances of survival. Moreover, it is necessary to make educated future projections that would help your business in the long term. Some businesses often focus on explosive growth, which is only beneficial in the short term. Remember to strike a balance between growth and infrastructure.

3-  Cashflow problems:

One of the most common reasons for business failure is the shortage of money. This could be a result of underestimating the cost of starting your business or miscalculating the finances needed to sustain your business in its initial years. Many businesses take around 2-3 years to become profitable. You could be doing good sales but still, your business might not be profitable because other overheads cost a lot. Therefore, keep realistic expectations from the income of your business until it becomes profitable. This is only possible if you are good at managing finances and mindful of the fact that your business will take some time before becoming profitable.

4-  Ineffective marketing:

Sometimes an inexperienced person will target the wrong audience while another will target every person in existence to market their product/service. This is due to a lack of market research and knowledge of your targeted niche. Not every product is for everyone therefore marketing it to the wrong people might result in losing your business. This is preventable if you define your audience clearly and have a well-structured marketing plan. In today’s digital world, having a strong online presence can also help in mitigating the risk of business failure.

5-  Hiring the wrong resources:

Let’s face the fact that you cannot do everything on your own. It is extremely important to hire the right employees who have the required expertise for your business. If you do not have a team of the right employees, operations will not run smoothly. For instance, having a good salesman means that he will generate more sales which will profit the business. Now if you hire an incompetent salesman, he will not be able to sell your product or service resulting in business failure.

Another factor in business failure could be that you hired the right employees but there is a conflict of interest between the employees and the business. When a scenario of us vs you arise in a business a downward spiral occurs. Therefore, it is important to appreciate your employees and never forget them.

6-  Inability to compete against market leaders:

Staying ahead of your competitor in a lucrative market is difficult. You need to innovate your product or service to stay relevant in the market. Of course, it is challenging to give market leaders a fight, but if you are unable to compete with market giants at any which level, it is better to pivot your business in a way that your consumer drives value from your business, which is only possible if you have a keen business sense.