The most worrying outcome for any business owner is failure; it means a loss of capital, time, effort and an unrealised dream.  In many cases, this initial capital is a combination of lifetime savings, money borrowed from family members or  bank loans.  The consequences of a failing business could be quite traumatic.  Some people lose homes, unable to pay children school fees, become depressed and experience many other uncomfortable situations.  Over the past decades I have witnessed and read about many start-up business failures; statistically it was reported that 8 out of 10 start-up fails within the first three years and about of 50% in five years. What is the enigma behind business failure?  Why do so many businesses fail?  In this article, I will explain six basic fundamental reasons why start-up businesses fail.

Business Plan

The basic fundamental flaw of small business is lack of an adequate business plan.

“A business plan is a formal statement of a set of business goals, the reasons they are believed attainable, and the plan for reaching those goals. It may also contain background information about the organization or team attempting to reach those goals” [Wikipedia Definition].

A business plan is the company’s roadmap that the owner should use as a guide or reference point. A well-prepared business plan will help the business owner understand competitors, marketing, specific industry analysis, break-even and sales forecast.  It is an important document that enables the business owner to articulate their ingenuity.

Leadership

Having a great business idea is one thing, managing business affairs and other people is quite another.  It is very important to know how to motivate staff and get the best out of them.  There has to be a balance, being too nice means staff take you for granted,  too harsh then you may end up working with disloyal staff.  In addition, a leader must show good examples of discipline, such as punctuality and respect for others.

Money Management

Ability to manage cash flow effectively is a major concern for non-financial business owners.  Managing cash flow with a thoroughbred discipline will give the business a high probability of survival.  Good understanding of working capital, the use of petty cash, keeping cash book register and regular cash flow forecast will provide a business with a strong foundation of meeting financial obligations.  Certain business owners are unable to separate individual expenses from business expenditure.

Effective Controls

Lack of standard working procedures and controls could lead to staff working against the business culture.  There should be a simple standard working procedure that outlines the company’s principles and the culture in which all employees must adhere to. Failure to have this in place could lead to customer or client dissatisfaction and more importantly loss of assets.  Perhaps half-day induction for new staff could mitigate this risk. The use of technology to control fraud, protect company assets could help to prevent loss of valuable assets.

Marketing

Lack of understanding of basic marketing concepts is another business principle that most business owners tend to overlook or not handle properly.  Simply advertising your business in a glossy magazine is not enough.  Owners must think seriously about branding and understand the market in which they are competing.  How a company executes its business may be a key driver of its success, but how it is perceived is equally important.  Perception as they say, is reality.  Some business owners do something quite contrary to the image of their business.

Customer / Client Engagement

We are living in a world that is constantly changing.  If customers’ preference is changing so should the service or product offering.  Quite often business owners are rigid and fail to read between the lines of their customers’ demands and complaints.  By conductingregular customer satisfaction surveys with a careful analysis and understanding the implication of the result on the future of the business the owner will stand a better chance of staying in business and be ahead of the competition.

Of course there are may other reasons why businesses fail such as harsh market conditions, lack of liquidity, location and many more.  However, the above outlined factors are essential and fundamental principles that will enable your business to stand the test of time.

Ajibade Yusuf BA (Hons), FCCA, MSCI, MBA 
Ajibade is an alternative investment strategy expert, a freelance writer and CEO of Gradient Consulting Africa (www.gradientconafrica.com)