It goes without saying that owning a business is hard. With all the wonderful things that come with owning a business, there are also a lot of odds stacked against business owners. In fact, only about 50% of businesses make it to their 5-year anniversary, and nearly two-thirds of businesses close their doors by year 10.
Why is it that the majority of businesses aren’t able to survive past a decade? Sometimes there are issues outside of a businessowner’s control – disaster, disability, death, industry changes, regulations, etc. Let’s explore 5 common reasons businesses fail that are well within the control of entrepreneurs.
1) Lack of Clear Vision or Strategic Planning
Clarity around purpose is paramount – mission, vision, and business strategy must be well articulated and embraced by employees. Mission & vision statements are more than a feelgood statement at the top of a website. If employees do not know where the business is headed, they will decide themselves. As you can imagine, that doesn’t often end well.
A well-written business plan with actionable goals that is shared with all employees is a great start to ensuring that your business isn’t offtrack as it relates to strategic planning. For more information on creating a business plan, read our blog post: “The 4 Pillars of a Strong Business Plan.”
2) Poor Financial Stewardship
Mismanaging finances isn’t always as cut and dry as one might think. Sure, draining the operating account to buy an Italian sportscar does happen, but oftentimes poor financial stewardship arises in a much stealthier way. Rather than being a spendthrift, a common financial mistake entrepreneurs make is pouring too much back into their company. They won’t take a salary, they will “reinvest” (AKA throw away) their profits, and they will put employees’ needs above their own. Another common financial neglect is the “head in the sand” financial management system. This is when owners trust their bookkeeper and aren’t interested in the finances; they are unaware of any key metrics or benchmarks – often until it is too late.
Entrepreneurs can build easy to follow financial operating procedures and track key metrics. Adopting a “profit first” mindset and not overlooking themselves financially is imperative. When owners get burned out, a common citing is that the work is hard and the pay is poor, so pay yourself first to avoid this destiny.
3) Ineffective Leadership & Management
Coming to own a small business can be quite a phenomenon if you think about it. One day you are a great computer programmer, and the next you own an IT company. Or one day you are an excellent petroleum engineer, and the next you own an oil & gas business. There are undoubtedly some details left out in between those two examples, but the bottom line is this: the majority of business owners became business owners because they were really good at their job. Entrepreneurs are risk takers and competitors, so the next step in their career was to take a chance at it on their own.
What this means for most entrepreneurs is that they need to accept that they likely have very little formal training in owning and managing a business. They are enrolled in the school of hard knocks and learning as they go. There’s nothing wrong with getting started like that; however, business owners eventually need to invest time in learning about effective leadership and management. That doesn’t mean they need to run out and get an MBA, but they should consider reading books, listening to podcasts, engaging a mentor, enrolling for training, etc.
You might be a great computer programmer, but writing code won’t run the business. Don’t just be great at your job – become a great leader & manager, or else your business will be at risk. For more insights on business strategy, check out our blog post “Making the Shift: Working ‘on’ Instead of Working ‘in’ Your Business.”
4) Failure to Adapt
“That’s how we’ve always done it” might be the six most dangerous words in the English language if you are a business owner. Sticking to outdated practices or being resistant to change can quickly render a business obsolete, especially in fast-evolving industries. For instance, businesses that ignored the digital revolution found themselves at a severe disadvantage. To thrive, business owners must be willing to embrace change, whether it involves adopting new technologies, revising business models, or simply being open to new ways of thinking. Staying current with industry trends and continually questioning the status quo are essential strategies for success.
Adaptability also means being responsive to the competitive landscape. As new competitors emerge and industry standards evolve, businesses that adjust their strategies and operations accordingly are more likely to succeed. This might involve reevaluating pricing models, exploring new market segments, or innovating product offerings to better meet customer demands. Failing to monitor and respond to these external changes can lead to lost market share and diminished relevance. Therefore, fostering a culture of continuous improvement and responsiveness within your organization is key to maintaining a competitive edge and achieving sustainable growth.
5) Neglecting Customer Needs & Feedback
Entrepreneurs are a proud bunch – of course there are financial incentives to owning a business, but most entrepreneurs are truly driven by changing the world. When you feel this greater calling, you are more likely to be emotionally invested in your work. And when you are emotionally invested, bias can creep in, so it is easy to say things like “they were never a good customer anyway” or “when they own the business, they can do it how they want.” Business owners are tempted to rationalize away any bit of criticism because they are so proud of what they built and no one will ever understand what it took to get to where they are now. The reality is that this mindset can really make business suffer. If customers are not heard, they will eventually take their business elsewhere.
Listen to your customers and clients. Utilize surveys and engage your key relationships to solicit feedback. You might even consider convening an advisory board of key customers, vendors, and other relationships to help provide you with insights from an outside perspective.
Conclusion: Turning Pitfalls into Opportunities
Owning and operating a business is fraught with challenges, but understanding common pitfalls can significantly enhance your chances of success. From ensuring clear strategic direction and sound financial management to embodying effective leadership and embracing adaptability, these elements are crucial. Additionally, maintaining a strong connection with customer needs and feedback is vital for ongoing relevance and growth. Each of these areas offers a unique opportunity for improvement that, when addressed, may help mitigate risks and contribute to a business’s long-term success. As a business owner, your willingness to learn from these common mistakes and proactively seek solutions will set the foundation for a resilient and thriving business. Remember, the goal isn’t just to survive but to thrive by turning potential pitfalls into steppingstones for success.
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