subject: Why Do Businesses Still Fail? [print this page] Why Do Businesses Still Fail? Why Do Businesses Still Fail?
The major reason for these failures has been attributed to the recession. However, is the recession really the cause or did it simply expose those companies that were caught naked when the tide subsided?
BDO Stoy Hayward reported that over 36, 000 businesses would fail this year and an even greater number will belly up next year. Government insolvency figures also highlight the fact that corporate insolvencies rose by 56% in the first quarter of this year. Incessant business failures, rising unemployment and economic stagnation due to falling consumer confidence coupled with businesses unwillingness to spend, will have profound implications for our economic recovery.
Dun & Bradstreet and other surveys reported long before the recession that 33% of all newly formed businesses fail within their first six months, 50% within the first 2 years and 75% close within 3 years of formation.
Consequently, we can safely conclude that businesses have been failing on mass long before the recession. The vital question is: why are so many businesses failing despite the advancements in business management & technology?
During my research for this piece, I came across several articles that relate to the question Why are businesses still failing? Irrespective of the differences in style and language the conclusion reached by numerous authors can be summarized thus poor management, insufficient capital and misunderstanding of the market.
Poor Management
The security industry of which I am a member is largely managed by two sets of entrepreneurs. They are either ex-service personnel who may lack business experience or entrepreneurs who lack security expertise. In the UK there are thousands of small independent security companies. However, the industry continues to be dominated by eight companies who control 52% of the market. These market leaders understand the basic concept that to be the best you have to recruit the best. Consequently, they hire the best ex-service personnel and business brains that money can buy. The result is a lethal wizardry, capable of penetrating any market and this keeps them ahead of the pack.
Similarly many entrepreneurs; doctors, solicitors, and even accountants are experts in their chosen field but, they lack business and management experience. Many even lack the ability to prepare a fully costed business plan which is the most crucial element of any successful business venture. A thoroughly prepared business plan will answer those fundamental questions which are essential for success. Why and how? The 'why deals with the entrepreneur's vision, goals & objectives, the 'how' addresses the critical success factors; market, competition, finance and potential problems.
Insufficient Capital
This remains, according to recent research, the single biggest killer of many business ventures. The inability to raise the required capital coupled with the failure of most entrepreneurs to accurately forecast their own financial requirements invariably creates funding problems upstream that wreck their ambition. Entrepreneurs in their zest to commence trading often overlook or inaccurately calculate the cost of running their business for the first few months. Cash in a business is like blood flowing through the veins. When blood stops pumping through the vein, the heart stops beating. Similarly when cash stops flowing through a business eventually grinds to a halt. It is imperative that entrepreneurs from the onset understand the importance of cash flow, income and expenditure.
Customers don't just flock to a new product or service; entrepreneurs have to build their reputation and credibility in order to attract the level of customers they require to keep the business afloat. In this day and age, there is nothing like a new product or service. Everything on the market has at one time or the other been done by someone. Consequently, convincing people to change old habits requires time and patience.
Misunderstanding the market
Extensive market research from the onset allows entrepreneurs the opportunity to analyze market trends, prospective customers and most importantly the competition. Understanding these critical factors prior to the commencement of a business will dramatically increase the chances of success. A SWOT analysis taking into account the size of the market, demography and areas of concentration are essential starting points. Understanding these factors requires extensive market research of prospective customers, their buying habits and reasons for buying. The competition poses the biggest threat to any venture. Adequate research of the strengths and weakness of the competition allows entrepreneurs the opportunity to carve out a USP that can differentiate them from the competition. In order to position themselves in a market, entrepreneurs need to know how the rest of the field is already positioned. But as the subjects of insufficient capital and the market are intrinsically linked, they become major factors in determining the success or failure of most businesses.
The Bogeymen
An important element ignored by almost all the authors of the research I read is the role of consultants. 80% of businesses in the UK have had some form of interaction with a consultancy firm, private or publicly funded. Publicly funded consultancy firms such as the Business link and regional development agencies were established to assist start up businesses and to support their local business community. A high percentage of public funds allocated for business development is distributed through the Business Link or regional development agencies. They in turn distribute the funding to various private consultancy firms. Consultancy firms whether private or publicly funded play a crucial role in most business start-ups in the UK. Despite millions in funding each year from central government and the EU and the resulting mushrooming of consultancy firms all around the country, small businesses continue to fail.
There are various tiers of consultants the upper tier comprising successful entrepreneurs who have succeeded in building businesses from scratch and professionals who have excelled in their chosen field. This level also includes super successful individuals who through business have amassed a personal fortune. These people make the best consultants but are very expensive and not readily available to the small business owner.
Then there is the lower tier of consultants, they can be found in Business link offices, regional development agencies and other publicly funded organizations. One can never discount the enormous benefit these organizations bring to start-up business in terms of helping to create a business plan and giving entrepreneur's information about their legal obligations. However, in terms of growing a business most of these consultants have a poor track record. This brings us to the next question: who are these consultants and are they failing businesses?
They are mostly made up of failed entrepreneurs, unemployable bankers and opportunists. Because the barrier for entry is so low, anyone who has ran a failed business for a few years or has worked in a bank can take a few courses and show up later as a business consultant for the Business Link or regional development agencies. How can someone who has failed in or never ran a business be realistically expected to give advice that will lead to success? Nevertheless, as entrepreneurs struggle to find help and advice, a vast majority turn to the Business Link and regional development agencies. Unfortunately, the advice coming from these organizations is at best poor. Sadly, this is often a reflection of the quality of consultants that are readily available to small businesses or budding entrepreneurs, and in my opinion this is a major cause of business failure in the UK today.
I will never doubt that the Business link and regional development agencies are well placed to provide the type of services required for the success of businesses in the UK. However, there is a crying need for them to be restructured to allow for a greater understanding between consultant and entrepreneur. From start up business to experienced entrepreneurs the dynamics are different; therefore we need a different approach at every stage. 87% of businesses that go through an incubator programme survive past 5 years while only 15% of businesses that go through the publicly funded consultants remain in existence beyond five years. ReasonThe incubators have a stake in the success of those ventures. Whereas a consultant in Business Link gets paid even when the business he mentored fails. Thus the need to create mechanisms for accountability within publicly funded consultancy firms.
