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Reasons For Business Failure With Examples

Every business starts with a eureka moment.

It’s the sudden realization that your idea could, indeed, become a business.

Having a good idea, however, doesn’t happen overnight. It takes a lot of time, a lot of bouncing back and forth in your mind before finally, it starts making sense.

Indeed, there is no such thing as going to bed one night and waking up the next morning with a killer idea. It’s a long process during which you question your belief yourself; you discuss your inspiration with friends at the risk of them mocking you – after all, criticism helps your idea to grow.

Therefore, it’s not uncommon for enthusiastic first-time entrepreneurs to assume that once they’ve finally sorted out the business idea or services they could offer, they can just let it roll and hope for the best.

I remember as a kid, I witnessed my parents struggle with many businesses. Although they were always quite enthusiastic to try new things, I still wondered why we were always changing shops and goods almost every three months.

Well, as I grew older I began to see why we were always changing from one shop to the other – our business kept on failing. We would accumulate so much profit in the first two months and in the third month, we would fold up due to some really bad management. I began to wonder why we couldn’t just stick to one business and expand in due time, just like the businesses I see on the business newspapers that rake in millions in gross profit.

We obviously missed some steps. Let me shock you – your brilliant business idea is unlikely to be successful if you miss any of these essential building steps. The truth is, a significant percentage of new businesses are bound to fail after the first three months or one year of operation. Here are the reasons some businesses fail.

#1. Lack of Planning

Your idea is only the beginning of your business journey. However, if you truly want to navigate safely to the market, you need to have a business plan.

Indeed, your plan includes the estimated costs of launching your company and the forecast revenues. By using these two figures, you can define when and where to spend money to establish your presence. More importantly, you can know how to recoup your investment.

Without a plan, you’re unlikely to be able to monitor your profits or control losses.

Why? Because losses happen during the first few years as you’re building a brand new presence in the market. 

#2. Poor Management

Most times, businesses fail as a result of bad management; it is usually the most common culprit for failed businesses. However, bad management isn’t the only cause of business closure. 

In my JSS2 or 8th grade in high school, I was a very keen student of agriculture and would have gone for it as a major in university if I hadn’t gone for engineering. Well, I learnt in my agricultural studies class that so much care is given to crops when they are in their early stages.

For instance, rice plants are nurtured and cared for twenty-four hours as seedlings until they reach a mature stage of their growth. This is pretty much the same process in business. You need to pay special attention to your business at its early stages. A popular misconception is that when the business begins to grow, you should begin to monitor things with a UV microscope.

On the other hand, when a business has matured, it would take a mighty hit to bring it down unlike when you are still struggling to make enough profit and pay rent. Smaller children need more care and attention – smaller businesses also need that same care and attention.

#3 Lack of location research

Back to my story. While my parents changed businesses, we also moved locations.

Believe me, relocation is not my thing – I hate moving. It gives me this unnecessary awkward nervousness of what the future holds. Now, you can imagine what it feels like to change businesses. I am sure I am not the only one that shares this predisposition.

Nothing beats settling down in one industry and growing your business to become a leading brand.  However, unless you know why each business fails in such a short time, you will be in the dark and will continue to jump from one business to another like a bird whose forest is on fire.

Where should you establish your business idea? For new entrepreneurs keen to have an office instead of working from home, the cheapest option is typically better. In fact, it’s not uncommon for startups to establish themselves in rural areas or on the outskirts of large cities.

Unfortunately, the location can have an impact on the facilities available to your everyday processes. Water supplies, for instance, could be limited when you’re away from the town.

Small manufacturers, agricultural businesses, or even industrial firms that have not planned for a large water tank to harvest rainwater as a backup might find themselves unable to work for long periods of time.

Additionally, rural broadband access also plays a significant role in everyday business. Rural locations can dramatically affect your activities if you haven’t weighed your options well.

#4. Businesses not suited to customers

Who are the customers of your business idea? If you can’t answer the question, you may not know how to target the right target.

Your first step as a new business on the market is to study your customer personas.

Use keyword tools, social media information, Facebook Insights, and data-driven surveys and feedback. Then you can gradually build a realistic customer view that encompasses many audience types. 

#5. Lack of financial backing

Lastly, without funding, you’re going to struggle to bring your business idea to life. A commercial loan can be tricky to obtain when you’re a new entrepreneur, but you can consider crowdfunding platforms, local investors and even bootstrapping.

The risk is less if you go for the later.

From knowing how to establish your business to understand the limitations, there are questions you need to answer before your idea can be a successful company.

Don’t be tempted to rush through the steps; your future success depends on your patience and strategic approach. 

#6. Poor Customer Services

When it comes to customer service, big businesses tend to have an upper hand in a lot of things compared to small start-ups. They usually have a functioning marketing/customer relations department that is tasked with following up on new trends and policies.

However, there are little things these big businesses fail to do and small businesses like yours can use to their advantage.  Most big companies, after a while, are not able to create that familiarity with their customers the way smaller businesses can.

When you cannot point out at least one unique thing or a selling point, there is no way you can attract the customers enduring poor customer service from big names. Most times, what start-ups do is to create an environment where your customers can feel like they are all getting special attention.

Psychology has proven that everyone loves to be noticed and treated specially. Actually, I feel that knowing your customers on a first-name basis is very important for startups, it creates a serious sense of familiarity and care.

Real examples of failed businesses

  • Gowell Supermarket

Gowell was a supermarket about two blocks from my old house in Lagos State, Nigeria. The supermarket was established by a couple who perhaps decided that running a supermarket was a profitable venture, and were keen to exploit the opportunity. The supermarket was large; one of the biggest in that area at that time. 

However, this couple was fully employed pharmacists who barely had time for their children let alone running a business. My sister was a regular babysitter for their kids when she concluded her junior WAEC examination.

Due to their busy time schedule, this couple handed the daily operations and management of Gowell to a church member and presumed friend. The business seemed to be doing well during their first six months. However, all hell broke loose by the last quarter of the year. My parents were close to this couple who were already laying serious complaints.

According to them, they were getting very little returns from their manager and goods were always missing from shelves. When queried, the manager usually blamed it on staff members and shoplifters.

My parents were shocked to hear that they were finding it difficult to pay their shop rent of just two million naira. Given the kind of crowd we see every day in that supermarket, one would think this couple was already on their way to success. My father, being the experienced person, was quick to point out that they made a terrible mistake by handing the care of such a large business to a non-investor.

If you want to do something or you want to start a project, make sure you establish top-notch management especially at its early stage.

Compaq

Compaq used to be one of the major suppliers of PC in the past. They failed to predict the shift of the market and we’re unable to keep up. Competition soon started overshadowing them and the company was bought for about 24.5 billion dollars by Hewlett-Packard.

Poor Business Plan

It is true that many businessmen, investors and entrepreneurs alike do not see the full importance of a business plan. There is a common misconception that a business plan is only needed when seeking investments, trying to get the attention of sponsors and can be abandoned once that is done. Personally, I beg to disagree. Business plans not only serves as the foundation of every business; it also serves as a reference book to future developments, managements and possible expansion. I can bet my last penny that Apple Inc. still has their business plan in their procession. In fact, most major or established businesses have their rigid initial business plan that they may only amend on the basis technological or industry policy changes.

With all that in mind, I think it’s obvious to say that one must take serious care to build a business plan. But is a business plan? Well according to to Wikipedia, a business plan is a written document could containing business goals, the method at which this goals would be attained and the time frame within which this goals need to be achieved. In other words, a business plan is sort of a guiding light on your journey to be successful.  Before you start building a house you have an architect come draw a plan, the same applies to the business world, before you start any business you must structure your business plan in a way that it can be edited, supported and achieved.

Example;

A&P Construction

A&P was a construction firm that collapsed before it was even ever really started. The firm was started by two inexperienced fresh graduates of civil engineering and architecture. Although, these two men were very skilled and I was opportune to meet one of them during a seminar, he was nice and very polite and I thought it was a shame that his business collapsed. They started the company with what I would call a very faulty business plan. First of all, they decided it would be the best idea to go for the big jobs rather than building their foundation from the underground. Trust the bigger construction companies, they had the reputation and could easily get jobs. It was not long before A&P couldn’t maintain running cost and the small business collapsed. 

 

Employing Too Many Staff

This is a mistake that I found out majority of small business owners make especially if it’s their first time running an enterprise. I don’t know if it is the excitement of becoming a manager but small business owners tend to employ ten persons for a job that five people can do comfortably, eventually these running costs will start weighing down on the business.

Example;

 

Blockbuster

In 2004, blockbuster employed over 80,000 people worldwide, with over 9,000 rental shops. Even though the company was at its peak, I think it was poor foresight and a terrible strategy that led to a decision like that. To cut the long story short, blockbuster filed for bankruptcy in 2010 due to a debt of over eight hundred and fifty million dollars. It did not help that a small rather unsuccessful company call Netflix posed a very serious competition. It was just accepted that blockbuster paved the way for other movie streaming sites like Netflix.

Poor leadership

This is another low key problem that most smanll businesses experience. Many business owners hate to admit that they lack the right skills to grow and expand a business properly. This is why we have businesses that a struggling especially when it comes to making key business decisions. Just like the music industry, a lot more goes on other than the music recording, there are studio time, album sales, digital sales, show bookings, security and appearances

 Business is not for everyone and that is a fact. I have seen boys that were given a whooping 5 million naira to start a business, they started the business quite alright but the business usually ends up crashing.

Tommy Clothings

Tommy Clothings was a really popular clothing store in Lagos at that time. They made customised wears and even styled some celebrities. I remember my sister buying a shoe from them around 2012. Well Tommy Clothings was a started by a young man called Tomiwa Akintola. He is a very talented tailor and can do things I have never seen any other tailor do before, and now.

Tommy decided to expand his business and manage a clothing store where he sold his own clothes, and other brands as well. The only problem was that Tomiwa although a good tailor, he was a terrible businessman. He found it very difficult to separate business from friendship. That is why his friends will troop In and take things on credit. His stock soon started to decrease until there was nothing to sell and no money to account for it, he was left chasing debtors. Yes Tomiwa is a nice man and a terrific tailor but, he is terrible businessman that is really not cut out to lead a business

Poor Financial Management

Yes this a problem that plauges many small start ups and inexperienced managers. Usually at the early stage of a business, balancing profit and running costs can be quite frustrating. Most times managers find it dont know how to separate capital from profit. In business turnover is very important, however, if you aren’t getting any profits it is almost impossible to continue in the business. It is easy to sell products at cost price but the whole thing boils down to whether you can stick your shop after your inventory is exhausted.

Example:

Woolworths

Woolsworth a candy company that folded and rendered more than 27,000 people jobless. Most experts believe that it was poor financial management that brought down one of the biggest companies down. It started out with a few store closing down in the late periods of 2009 and finally in 2015, the company was dissolved.

Bad accounting

If you can remember the company Eron, then you probably understand where I am going with this particular one. Well for those of you who don’t know this story; Eron was a company who’s name is now synonymous with falsifying profits. Eron executives will post misleading profits of millions of dollars and meanwhile they are in debt and barely floating. Executives will bribe and pressure external auditors to shred and destroy all evidence. If Eron succeeded in erecting a facility, they will post the projected income rather than the actual income of that facility. The result was a 63 billion dollars debt tied in assets which till this day, remains the largest corporate bankruptcy.

The fact remains that to make sure something like this doesn’t happen in your company, make use of a reputable audit firm to help do a proper and detailed account on your business. There are men with supposedly large enterprises that sit in their penthouse offices, only for bankruptcy to creep up on them because they never took their time to find out whether the money is really or not.

Over expansion

Just as complacency and lack of expansion cna be dangerous to business, expanding when you shouldn’t can be the final strain that cuts your business.

Example-

Yu-mom Kitchen

Yu-mom kitchen used to be a very popular eatery in my area. They were however still very young in business when the manager decided another branch was a good idea. The new branch was a serious strain and soon they were using money actualized from the main branch, to keep the other running. This whole thing continued for sometime until they couldn’t keep up and they shut down. The truth is that managing more than one  place might seem exciting, but it is not easy and unless you are sure your business can handle the new branch, then you should build your current office instead.

Incompetence

 

This may be synonymous with bad leadership. However, incompetence might be on the side of everybody in the Business. There are times when businesses experience the kind of incompetence onle seen in Federal institutions, and it becomes a problem for them.

Example

RetireKing

Retireking used to be a co-operative society that ran across different secondary schools in Nigeria. At first they were doing so well that other institutions wanted to be a part of it.  Honestly everyone knows that a combination of corruption, bad leadership and incompetence brought down retireking. Before they shut down in 1992, retireking would actually give you a product and take the money but by bit from your account with an agreed interest.

Competition

Sometimes when a business crumbles, it is not due to incompetence or lack of funding. Sometimes competition can be the reason why a business fell. The market is a very unpredictable environment and small changes or what you might pressume as small changes, might affect your business adversely.

Example

 

Mr Biggs

Many Nigerians know about Me Biggs, how popular they were and how quickly they fell in the face of competition. Mr Biggs used to be the go to place for take outs, family outings or even a business meeting. However, they failed to make the necessary adjustments when new competition arrived. Other fast food restaurants like Chicken republic and Domino’s Pizza hut began to outshine their predecessor and soon Mr Biggs shut down.

How To Avoid Business failure

 

Commitment

Unlike other sites that will begin to list out not so helpful tips on how to avoid business failure, the singular tip that covers all is commitment. You must be committed at the early stage of your business to actually grow it. You must also be committed enough to adjust properly to industry changes. Know when to expand your business and when to sit tight and manage what you

got, remember; A bird at hand is worth a more than two in the bush.

I hope this helps!

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Post Author: Chibuike Nwogbo

Nwogbo Chibuike is a student of Electronics and Computer engineering at Nnamdi Azikiwe University, Awka. He started writing at the age of 10 by learning new things and writing about what he has learnt. Specifically, he likes the feeling of creating another world through writing. He is also a dedicated Christian.

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