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Why Do Businesses Fail?

By Henry Rinder, CPA, ABV, CFE, CFF, CGMA

Entrepreneurship is the American way. Our country thrives on capitalism, and historically, small businesses create most new jobs. However, business enterprises are not without risk.

For example, statistics show that approximately 50% of all new businesses fail within the first 5 years. There are many reasons businesses fail. Here are my top five in reverse order of magnitude:

1. Lack of Adequate Management Controls
You cannot be in control of a business if you don’t know what is going on. With poor accounting, a company is flying blind. A lot of start-up businesses leave the number crunching until tax time, and that is not the right track to take.

An outside accounting firm can help keep you up to speed on a current basis and provide additional accounting and business advice. Proper division of duties among employees is key to providing the internal controls necessary to prevent employee theft.

Your outside accounting firm can assist you in setting up and maintaining a proper set of internal controls. Cybercrime is on the rapid rise. It’s not just big companies like Target and Sony that cyber criminals go after.

Many small firms get victimized—and it can be deadly to them. Educating your staff about these risks and having technological countermeasures is critical to survival. Every business needs defensive systems in place to prevent cyber crimes.

2. Divisions and Dissension
“The ultimate throttle on growth for any great company is not markets, or technology, or competition, or products. It is… the ability to get and keep enough of the right people.” If the employees who serve your customers aren’t enthused about coming to work, it’s going to show in their performance and hurt your business.

Employees who aren’t happy about their work aren’t likely to put in extra effort or stay up late to help your company. Gallup research had shown that 70 percent of American workers are either not engaged at work, or are actively disengaged to the point of trying to subvert the work of colleagues.

Most personnel issues start at the point of hire. If your business continuously hires the wrong people and experience personnel problems that means that your hiring process is not fine-tuned.

Learn from Sun Tzu and Attila the Hun, terminate people that don’t belong in your business and replace them with people who display appropriate attitude, values and work ethic.

3. Over-Expansion
This one might be the saddest of all reasons for failure — a successful business that is ruined by over-expansion. Over-expansion includes moving too fast into new market segments or borrowing too much money in an attempt to keep growth at a particular rate.

It includes rapid introduction of new and unproven products or services to the detriment of the core business. Even well-established and successful commercial franchises fall victim to over-expansion. The key to successful growth and expansion—and avoiding business failure—is planning.

Solid business vision and strategic thinking are necessary to adequately take into account the risks associated with expansion. Business growth and expansion require careful planning. First, make sure your business is stable and liquid before expanding.

Thorough research and analysis ensure the time is right. Consider local and regional demographics and spending trends, future development plans for the area and pertinent threats before moving forward.

4. Technological Obsolescence
Technology plays a big role in operational solutions that allow businesses to deliver better products and services, faster and cheaper. Robots and artificial intelligence permit us to automate redundant processes that do not require human manipulation.

Entrepreneurs need to leverage off new technologies. Businesses that do not embrace technological advances are being disrupted and rendered obsolete. If you are in business today, you need a website and a social media presence.

In the U.S. alone, the number of internet users (approximately 88.5 percent of the population) and e-commerce sales ($394.9 billion in 2016 according to the US Census Bureau) continue to rise and are expected to increase with each passing year.

At the very least, every business should have a professional looking and well-designed website that enables users to easily find the business and avail them of your products and services.

An added benefit is your ability to take orders and sell products online. Online customer and employee ratings are also extremely important. Take them seriously or you will be out of business.

5. Poor leadership
All successful businesses are leader-driven. From vision to entrepreneurial spirit, financial management and engaging employees, vendors and customers, business leaders affect every aspect of the business. The tone of the business is set at the top.

The most successful entrepreneurs are visionaries and mentors who are absolutely committed to the success of the business above all else. Great leadership drives success. Lack of leadership comes in many forms: a leader who is never there, an indecisive leader, a leader with poor understanding of human nature, a leader who lacks vision and planning skills, etc.

If you are reluctant to take charge and resolve the issues, your business will slip toward failure. Start-up entrepreneurs who go down hard might not have their names splashed across the headlines, but their reason for failure is the same: self-sabotage through poor decisions and toxic tenor, creating the perfect recipe for failure.

Do you understand human nature? Do you have the ability to relate to other people? Do you struggle with anger issues? Are alcohol and other drugs interfering with your life? Entrepreneurs who succeed spend time on their own personal development and the personal development of the leadership team.

Successful leaders are other people’s mentors and heroes. On the other hand, dysfunction at the top kills a business. Effective management and leadership skills are essential to business-building, and a lack of either leads to confusion and conflict within the ranks. Dysfunctional leadership causes business to fail.

In Summary:
When it comes to the success of any new business, you — the business owner — are ultimately in control of your own destiny. With the goal of succeeding in mind, work hard to make it happen.

Contact our professionals for help with your business concerns. We would love to assist you in your quest to succeed.


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June 12, 2018
Perfect article! This is entirely assisting and one who is going to start his new business must read australianessays article. To understand all the sensitive points which matter a lot in new business. Hard work is the key to achieve the goals