Business Failure: 10 Reasons Why Businesses Fail

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So, you finally decided to quit that tedious day job and now intend to pursue your business plans? Being your boss and having your brand can be pretty appealing, but only if your startup manages to be successful. 

However, as a new entrepreneur, there’s plenty of uncertainty that you’ll need to face before achieving any level of stability for your new business. From high inherent risks to developing new abilities required to bring your brand off the ground, business owners must toughen up for the long haul. 

It’s also important to understand what needs to be done to keep your business alive. According to the Bureau of Labor Statistics, 2 out of 10 companies fail in their very first year, 3 out of 10 fail within their second, and 5 out of 10 fail after five years in business. 

All in all, 70 percent of all businesses fail within one decade. Although these statistics make it seem like it’s a matter of luck to succeed, knowing the reasons for business failure is undoubtedly the best way to achieve success.

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10 Reasons Why Businesses Fail
business failure

Whether it’s for a new or established business, successful entrepreneurs realize and avoid the common pitfalls that lead to business failure. Understanding these obstacles allows you to know how to manage or prevent them. Which also will enable you to shed your fear of failure while developing your brand into a successful business. These ten reasons are what you need to avoid if you plan to survive in the cutthroat world of business:

1. Poor Planning

Putting up your own business may seem easy but can also be a bad idea without a proper business plan. You may be pretty confident with your business ideas but lack the business history and experience to form a decent structure around them. 

Instead of picturing your new startup as potentially one of the world’s most successful companies, develop yourself through plenty of research and business planning. Understanding your product, customer base, and immediate competition is a way to realize what sets you apart. 

Moreover, identifying your competitive market space and your customer’s buying habits will allow you to understand your market a whole lot better. This will enable you to plot a suitable business model that can be effective for your business.

2. Not Having A Need In The Market

In business, there are times when the most impressive ideas still don’t translate into high profit. Choosing an already crowded industry to open your business in without a stand-out market solution is simply negligible of the obvious. Even if you think that your product is the best, you entirely can’t rely on your biased preference. 

A CB Insights poll identified 42 percent of respondents who believe that most new businesses fail due to not having any market need. Neglecting to see where you can stand out to gain an advantage in the market might be the one-way ticket to business failure you never wanted.

3. Not Tracking Your Finances

To survive in business, maintaining positive cash flow should be your main objective. Otherwise, it would be best to consider alternative means of livelihood or maybe go back to that day job you came from. Achieving a certain level of profitability doesn’t mean you can go ahead and splurge all that new money as well. 

Drying up your business’ bank account is also a quick way towards business failure. It’s essential to maintain your cash flow through the sales cycle while keeping careful records of your finances. This allows you to avoid overspending at all costs, so you don’t burn your startup capital before actually earning any profit.

4. Lack of Capital

New business owners can often be blindsided by their venture’s potential instead of focusing on what’s needed to keep it afloat. You wouldn’t want to be surprised by unprepared expenditures such as the rising cost of utilities, maintenance and labor. Small costs such as printing business cards and buying URLs can turn into massive spending in the long run. 

In fact, 33 percent of small business owners rely too much on getting the cash flow needed to keep their business running. Having enough reserve capital can carry you through unexpected costs and tough times brought on by seasonal slowdowns. It’s better to expect to spend double what your estimated startup costs would be, so you don’t put up a venture that would only lead to business failure. 

5. Failure to Deliver Value

Every notable business owner knows that putting up a business isn’t an easy get-rich-quick scheme. It takes a lot of hard work to get your venture off the ground. And if you can’t place enough value in the process, your customers won’t feel much value in your product either. Focusing on your company’s value and the manner you deliver gives you an edge over your competitors. 

Your customers will always prefer a business that over-delivers and can create a more organic buzz to your advantage. Learning how to define and communicate your value proposition is an important way of effectively connecting with your customer base. Developing your customer’s trust through authenticity is a rare commodity in business and will serve you in the long run. 

6. Wrong Location

Choosing the wrong location for your venture is a sure way towards business failure. Sure, you found yourself a cheap lease, and you’re feeling elated, but you neglected to realize that you chose the wrong location. 

For example, a business selling video consoles wouldn’t fare well in a community where the average householder is older than 50. Instead, choose a suitable space that minimizes cost and maximizes income while keeping mindful of the locale. 

Always consider traffic patterns and accessibility for your proposed locations. Also, be sure to check on your competition. Some businesses such as retail and food can find it helpful to be near similar stores. But if your business needs the bulk of the market share, choose a fitting location away from the nearby competition.

7. Expanding Too Fast

Attaining growth in your business is always good, but don’t get too cocky. Overexpansion can be a severe misstep and can lead you towards business failure instead of the Fortune 500.  

Expanding your business too fast brings predictable risks that you need to prepare for. Aside from added instability, possible ineffective management, and unwanted financial loss, business growth may provide further pressure on your existing system that you might not be able to handle. 

It’s essential to plan the growth of your business and gear your company up for increased production and new payables while making sure to maintain your quality of service. Aggressively over-expanding may thin out your resources and add unnecessary stress that can risk your entire business.

8. Failure To Adapt

If you intend to keep your business running for the long haul, you need to change with the times. Recognizing opportunities and being flexible well enough to adapt is vital to thrive in business. If something’s working well for you, don’t expect it to stay the same forever. 

Failure to anticipate trends or react to competition and changes in the marketplace can also lead your business to more danger. Keep well above the pack by staying innovative and constantly aware of your business capacities to remain competitive. 

9. Lack of Effective Marketing Strategies

Now that you’ve set everything up and your business is running, you can’t just sit back and wait for customers to show up. You need to identify effective marketing strategies for your business that can let customers know that you exist. Promoting your business through advertising and online marketing are effective means of bridging that gap. 

Marketing is crucial for any early-stage business and requires long term planning to make sure you execute these plans while staying within budget. Those who don’t take the time to create and implement cost-effective and successful marketing campaigns are more likely to head towards business failure.

10. Inadequate Management

If you thought that putting up your own company makes you everyone’s boss, you already fail to comprehend the responsibilities of being a business owner. Running a business involves a lot of administrative tasks. 

From managing employees, inventory management, and all the necessary bookkeeping involved towards making a profit, you need to be able to show strategic and effective leadership. 40 percent of small business owners consider bookkeeping as the worst part of owning a business. 

However, neglecting this important aspect of the company can lead to more mismanagement and assure business failure. A successful business owner needs to manage all aspects of the business effectively while constantly being aware of where you stand at all times. Many successful companies often face the problem of growing beyond their management resources and skills, which in the end, hurts their bottom line.

5 Examples of Failed Businesses

Putting up your business may be a victory in itself, but plain existence doesn’t assure longevity and success. The business world is full of instances where even huge companies find themselves facing business failure due to their inability to evolve with the market. Whether it’s their inability to innovate, or a total collapse of their business strategies, these examples are worthy of taking note of and learning from: 

1. Eastman Kodak

The Eastman Kodak Company, better known as Kodak, was founded in 1888 and was the most famous name in photography and videography in the 20th Century. The company revolutionized the industry by providing affordable camera equipment and making it more mainstream. For many years, Kodak was unmatched with regards to its success all over the world. 

By 1968, the company held 80 percent of the global market share in the field of photography. Throughout its operation, Kodak utilized the “Razor and Blades” business plan. This model allowed Kodak to sell cameras at cheaper rates with only a small margin for profit, with customers needing to purchase films, printing sheets and other accessories at a high-profit margin. 

This provided Kodak with huge revenues, which went in line with its massive popularity. Its tagline even became a common term that referred to recording personal events as a “Kodak Moment”. Yet, despite being one of the world’s biggest imaging companies, Kodak declared bankruptcy in 2012, brought on by a series of wrong decisions that led to its failure. Kodak relied on pretty much the same formula it operated on since it first began. 

The company failed to foresee that as digital cameras started to gain more ground, Kodak would lose its primary sources of profit. This led to substantial financial losses and factories being closed down because the demand quickly significantly diminished through the years. 

Steve Sasson, was an electrical engineer at Kodak. He even tried to pitch his new invention to his bosses but wasn’t even taken seriously. Talk about a huge missed opportunity! Eventually, Kodak initiated its shift towards the sales and production of digital cameras. 

By 2011, the stock prices of Kodak hit their all-time low of $0.54 per share, which continued to lose more than 50 percent of its value within that year. By 2012, the company had used up all of its cash reserves and resources, forcing Kodak to file for bankruptcy protection.

2. Toys "R" Us

Toys “R” Us was founded in 1948 and became the leading toy business company for more than 65 years, with more than 800 stores in the US and more than 800 worldwide. The famous toy store chain would eventually find itself facing slipping sales and mounting debt added pressures from price competition brought on by other mass retailers. While the company tried to address issues such as a surplus of inventory, disorganized shelves, and near non-existent customer service, going into a store just wasn’t the same anymore. 

The diminishing shopping experience wasn’t the main issue, however, which led to its demise. It was the failure to innovate that allowed its competition to gain more ground. Toys “R” Us was considered a “category killer”, claiming the toy category all on their own. This gave rise to large competitors like Target and Walmart, who started offering the same products at a lower price. 

Toys R Us could not compete with the low-profit margins and suitable shipping options that the others offered. In 2000, Toys “R” Us signed a deal with e-commerce giant Amazon to be its exclusive toy seller. This agreement ended in 2004 when Amazon started opening its platform to other toy vendors. This held back the company from shifting to e-commerce early on while losing its chance to establish an online presence. 

The company watched as Amazon claimed more ground in the toy market. The company continued to hold on to the idea that its stores were the centre of the toy universe until those stores started to close. In May 2017, Toys “R” Us announced its plan to jump-start its e-commerce business but was simply a little too late. A few months later, in September 2017, Toys R Us filed for bankruptcy amidst its huge debt amounting to $1 Billion. 

3. Tower Records

Founded in 1960, Tower Records was the pioneer in creating the concept of a retail music mega-store. As an international retail music franchise with numerous stores worldwide, Tower Records became the go-to spot for CDs, cassettes and collectable vinyl. It also sold DVDs, electronic gadgets, video games, accessories and even toys. In 1995, Tower Records launched, making it one of the first retailers to complete the online shift. 

However, due to the challenges of music piracy, the introduction of the iPod and iTunes, and the development of streaming platforms, the company fell prey to the technological shift. The aggressive online expansion in the 90s eventually led to heavy debt, prompting the company to file for bankruptcy in 2004.