reasons for business failure, why businesses fail

Let us face it, everything that starts has an end to it. But when it comes to business, it is tough to digest. The business failure rate is high and there are many reasons for business failure that exist. From genuine reasons to silly reasons, there are many mistakes entrepreneurs make. I myself made a lot of mistakes during more than a decade of being in business. I had many entrepreneur friends that fall in various categories. But in my understanding, you can fall under only three categories of entrepreneurs. These are Successful, Unsuccessful and Struggling respectively. Due to this I decided to write this article to guide newbie entrepreneurs. If you are running a business or planning to start a business, this will help.

Business Failure Rate

As per some online reports the business failure rate is more than 90 percent. Out of these 8-10 percent who survive, only a handful become success stories early. Rest all struggle to exist for an endless period of time until they taste success. Small business failure rate (less than one year old) is close to 95 percent. Next time you think about chances of survival in business, read this and be realistic. Because when you think about why businesses fail? you work on solutions.

Why do Businesses Fail?

The answer to this question is not so simple. Businesses fail due to many known and unknown reasons. There are reasons beyond your control. In this article we will try to explain all of them.

1 – Poorly Designed Business Plan

Most entrepreneurs make this mistake. They are full of enthusiasm and energy that sometimes result in over confidence. They are so sure about their success that they do not invest time in research. As a result they miss out on many important details. For example: if you are making a product that does not have a demand, you will fail for sure. Creating demand for a new product is a long process. In addition, promoting a business requires a lot of money and other resources. Therefore, we advise every business to create a business plan as the first step of starting a business.

2 – Running Out of Funds – Money is among primary Reasons for Business failure

In the simple world, business runs on and for money. If the financial aspect is not involved, it is not business. You can also call it a non government organization. NGO is an organization that works for social causes. But business works for money and cannot survive without it. Most businesses fail when there is no money in the bank account. In accounting terms this money is known as operating cost. Whatever be the reason, if you are unable to pay salaries and other dues, you are about to fail.

3 – Lack of Experience

Many people start business as teens. There are many business ideas for teens and it is a good age to start a business. In fact, this is the best age to start business. But the other side of the coin is lack of experience. There are well established brands in all spheres of the business world. It is tough to survive. Whenever the situation comes, entrepreneurs are clueless. They do not know what to do when the business is about to fail.

4 – Debt is one of the biggest Reasons for Business Failure

Most entrepreneurs take business loans for growth. In fact, initially they see growth as the primary reason for taking loan. Banks are also ready to pay you if they see any potential. But in most cases, the business goals are not clear. Due to this businesses take debt when they run out of money. This is where the problem starts. When you take out a loan to manage day to day expenses it clearly means you are not earning enough. The same rule applies to a household or a whole nation. If your income is less than your expenses, instead of controlling expenses, you take loans. This is the first step in getting caught into a debt trap.

When you do not pay your EMI on time, banks start adding interest. After some time, they come after you for recovering the debt. The situation is worse in case of secured loans. Many companies go bankrupt due to high debt. They fail to make payment that works as a cause of business failure.

5 – Business Failure is also linked with Overspending

Most households have a monthly budget and business is no different. Overspending is a serious problem. As an entrepreneur, you must minimize all the expenses. You can also delay the payments if you can. Most entrepreneurs come from a salaried job background. Overspending is one of the common reasons for business failure but very few understand this.

Do not buy anything you don’t need, Otherwise you will have to sell things you need.

Many quit jobs in multinational companies and start business. In these organizations everything is organized. Due to this they do not even realize what kind of obstacles they will face in business. As a result, they keep spending money on unnecessary things. They take large offices on rent and hire staff on high wages. Here I am not asking you to cut wages. You should pay for the skills you need. The primary objective should be to save as much as you can. If you miss out on this, you will soon run out of money and shut down. For example: many people spend money on office interiors. You can take a fully furnished office instead and save a lot of money. There are many other things you can do.

How to generate passive income to support business?

Out of the many reasons for business failure, money is primary. There are many business ideas that can make you a billionaire. Similarly there are many ideas for passive income generation. You must create multiple sources of income to ensure funding for your current venture. For example: If you are running a restaurant business, you can start a food blog for extra income. Similarly, you can do it with any business model. You can also read our blogging for beginners guide for more information on this.

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