One of the least understood aspects of entrepreneurship is why some businesses fail while others succeed. The painful truth, according to a recent study by the University of Tennessee Research is that most businesses fail for one of the following three reasons.
46% of businesses fail due to emotional pricing, reckless spending, nonpayment of taxes, lack of planning, record keeping problems, and no knowledge of financing. Companies that succeed take pricing seriously. The prices they set are influenced by facts instead of emotions. As you set your prices consider the cost of material, labor, and overhead. Also, remember to keep in mind competitor pricing. Does this mean that you have to be the cheapest to compete? Absolutely not. You don’t have to compete on price, but you can’t ignore how much your competitors charge either. You can’t succeed on pricing alone, but your business will fail if you can’t get your pricing right.
Financially, conservative businesses live longer. By spending less, you can save on rent, manage your inventory better, outsource or hire less expensive employees, negotiate lower prices, and minimize your debt. The last one is key as businesses that fail to control costs run up huge debts fast. Not being able to keep said debt under control or paid off often leads to a downward spiral resulting in bankruptcy or business failure.
Plan early and plan often. Planning helps your business chart a course for the achievement of its goals. When you plan ahead you can make effective decisions about how to allocate resources to reach your objectives. As you set goals, you challenge everyone within your company to strive for better performance. You need more than a profitable product to build a successful business – you have to have financial competence to understand additional ways to make money. As you expand your financial knowledge you can increase your odds of being successful.
2) Lack of Managerial Experience
30% of businesses fail due to poor credit granting practices, rapid expansion that occurs too quickly, and inadequate borrowing practices.
It is possible to grow your business too fast, but the desire for sudden growth will force you to make damaging decisions. For example, taking out a loan can be a helpful vehicle for growth, but not if you’re struggling to make payments. A sudden decrease in revenue can even force you into bankruptcy. It is not uncommon for companies to file for bankruptcy with record revenues – it’s always cool to have record sales, but not if it comes at a price that breaks your business.
3) Lack of Experience (In Line of Goods or Services)
Another 11% of businesses fail because they carry inadequate inventory, have no knowledge of suppliers, or waste their advertising budget.
Mismanaged inventory can lead to an unnecessary increase in your working capital. Money you could be spending to grow your company can be unnecessarily tied up in inventory. Proper inventory management will also help you reduce your storage costs and save on rent which will ultimately make you more profitable.
Advertising can also be money well spent, but only if it works. Instead of the shotgun approach where you randomly spend on a variety of advertising media, test small. Increase spending as there is proof that it is working and can be measured through channels that prove this is effective ROI for you and your business.
You can improve the chances for your business’ success by initiating proper pricing and responsible spending practices, paying your taxes, planning ahead, keeping accurate records, and ensuring you have a basic understanding of finances. Grow your business only as fast as your business can handle and don’t ever compromise the quality of your product or customer service for your desire to shoot to the top.
George Meszaros is a serial entrepreneur and the co-founder of Success Harbor. Success Harbor is dedicated to document the entrepreneurial journey through interviews, original research, and unique content.