The #1 Reason Businesses Fail

Around 80 percent of businesses make it through their first year. In five years, only half of those have survived. And only about a third make it to their 10th anniversary.

I’ve written before about the reasons startups fail in my post, “The Top Reasons Startups Fail.”  These include a founder who is inflexible during the startup process, has no contingency plan and who fails to bring in a partner when necessary.

Another major reason startup businesses fail is there is no real need for the product or service they are offering. Many companies fail to do the proper research to determine whether that product or service is really needed prior to launching it.

But well established companies fail too. According to the 2015/2016 Global Entrepreneurship Report, which is published by Babson College and other organizations, more than half of businesses ceased operations due to lack of profits or financial funding. George Bernard Shaw said, “The lack of money is the root of all evil.” It’s also the number one reason businesses fail.

Starting a business without sufficient capital is a major reason startups fail. Even if a business thinks it has enough capital, it needs a contingency fund and a plan to obtain additional funding when needed.

But it’s not just startups that run into funding problems. I tell the stories in my book, “How Not to Hire a Guy Like Me,” about a few companies I worked with that faced major funding shortages. Some of these may be short-term cash flow problems, like needing to cover payroll for a few days. Or they may be more severe. I once worked with a company that relied on its Christmas catalog sales for 65 percent of its business. But UPS wouldn’t deliver the catalogs because the company had consistently broken promises about paying past-due invoices.

A similar situation happened with a company that manufactured oil products. It was behind on its payments to one of the vendors who supplied a key ingredient. The company couldn’t get more of that ingredient to complete a large contract because they didn’t have the funds to keep up with its payment schedule.

Fortunately, I helped both companies overcome their financial shortfalls and both are thriving today.

There are so many other reasons businesses fail. They have the wrong team in place. They didn’t anticipate changes in the market. Their business plan was poorly executed. The senior management is ineffective.

As a turnaround authority, I can evaluate the situation of struggling companies, implement a plan to get them back on firm financial ground, and see them go on to prosper. That’s why I do what I do. But many wait too late to ask for help, or sadly, never ask for help at all. So I’d add that to my list of why businesses fail. They don’t ask for help or they ask too late.

If you think your company could use help, don’t wait to ask for help. An outside consultant has the experience and knowledge to help you find solutions, whatever your issues may be. CEOs need to be proactive to survive.

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