The Reasons for Business Failure

Business failure is a common occurrence especially with globalization and a fast-changing business environment. According to Bloomberg, 80% of “entrepreneurs who start a business fail within the first 18 months” making a case that there must be specific reasons that could result in business failure (Wagner, 1). Small businesses play a huge role in economic growth and there is a lot of satisfaction from setting up a successful business through financial security and autonomy while contributing to solving the unemployment problem. There is a need to understand the chief reasons for business failure. This essay provides a review of the three major reasons why businesses fail and provide the lessons from business failure.  

Three major reasons why businesses fail

            Money is the major reason for a business to fail as new enterprises fail to consider the importance of sufficient funds to help an amazing product to succeed in the market. Many entrepreneurs underestimate the number of finances needed for startup costs, expansion, inventory purchases, and fortification of the businesses. When these aspects are not well developed, the business suffers from lack of adequate cash flow and disappointed customers drive the business to closure. The lack of adequate sources of finance for small businesses, as most depend on savings and loans from friends and relatives, make it impossible for urgent funds to be added to the business to keep it afloat during problems. When money problems emerge, the business fails to meet customer needs well and honoring supplier needs also becomes difficult resulting in the closure of the business.  

            Poor accounting processes are the second major reason for business failure with most small business holders failing to work with an accountant and only seeking such services for tax purposes. The effect is an inability to control the finances of the business and many could be diverted to personal spending and lowered profits. Entrepreneurs with inadequate accounting do not know how the business is performing and before they know, customers are leaving and employees are looking for other jobs. The need for an accounting officer in a small business cannot be stressed further as business cash flow and other accounting aspects are crucial to small business success.

            The third major reason for business failure is lack of planning. Entrepreneurs focus on starting a business based on their passion and seek to make the business succeed without taking adequate time to come up with a business plan to add to their creativity and enthusiasm. The effect is the lack of market understanding, competition, what customers want, how to engage customers both in the short run and the long run among other important factors. They also end up not even knowing the relationship between prices and profits and the operating expenses of the business. The lack of time spent on undertaking research to create a working business plan comes to haunt the entrepreneur as business fails to meet set goals and has to wind up.   

            I chose these major reasons for business failure as they represent the common and most apparent for all business failure. They are very crucial in the running of a business and when any of them are non-functional a business cannot survive. The three factors make or break for a business even established ones and hence most crucial for small business owners to consider to succeed. 

Lessons from business failure

            The massive rate of failure for new businesses presents a lot of lessons for individuals and companies. I believe learning from others mistakes is better than experiencing the negative aspects firsthand, for example, starting a business and watching it fail can be a tough experience. The first lesson from business failure understands the market. Undertaking in-depth surveys and focus studies on the market with customers and stakeholders will help an entrepreneur make correct decisions about customer willingness and ability to purchase a product. Pricing is an important aspect and failure comes sooner than later when an ineffective price is set in a market. Undertaking surveys and studies on the market allows a business to make correct marketing, pricing, and customer relations activities that will improve the chances of a new business succeeding in the market.

            The other lesson from the failure of a business is the need for entrepreneurs to learn to communicate better. An entrepreneur has to always engage the customer on the value of the product and understand what the client wants at all times. He/she will know changes in consumer needs and make changes to the value of the product avoiding the possibility of being left back while consumers seek new businesses that offer better value in line with changing tastes and preferences. An entrepreneur should be clear, concise and compelling in communicating with the client to ensure the value they provide is understood and differentiated from others in the market creating a rapport and lasting loyalty from the customers. 

            The other lesson from business failure is the need to undertake sufficient planning to understand the market and amass adequate amounts of money to manage. The need to know the market and get requisite skills and knowledge is also important for a business to succeed.

Work Cited

Wagner, Eric. Five reasons 8 out of 10 businesses fail. Forbes, September 12, 2013. Accessed on             https://www.forbes.com/sites/ericwagner/2013/09/12/five-reasons-8-out-of-10-       businesses-fail/#79bde1f86978