Why businesses fail?

Businesses fail because of people, period.

The effects of the failure can be observed, for example, on organization, processes, product or service, finances, marketing and sales.

The causes can be related, for example, with strategic planning, implementation, management, control, human resources, absence of competitive intelligence and external factors like market dynamics or government regulations.

If we are talking about new ventures or small enterprises, with less than two years, the most common issue, which takes to the reasons of discontinuing businesses, is related with financial problems.

The most common cause of the financial problems is related with managerial faults and a weak strategic planning.

Managerial faults can be because of absence of organization, control, follow-up, course corrections, or maybe wrong people in the wrong place, underestimation of the target market, costs were wrong estimated, and so on.

A weak strategic planning, or inside the drawer, is a great source of cause generation to a business fail. A strategic plan is a dynamic document. As the enterprise evolves, so does the market. The defined strategy must be updated and in the course of time corrections must be made to keep the boat in the right course with the right velocity.

Talking in a global context, each cause has its likelihood, which depends on the venture, the business environment, the global region and the profile of the entrepreneur. But all problems usually start with managerial faults and bad planning.

Also, usually, small entrepreneurs have a small cash flow, which causes the impossibility of a “second chance”. If a large enterprise makes a wrong investment and fails, it is only a bad investment and shareholders (or the government) will pay the bill. Small entrepreneurs do not have that chance.

Now, if we are talking about well established enterprises and large companies, usually the problem starts with managerial incompetence and expands to financial problems.

Well established enterprises need to have a continuous process of reinventing themselves. They should use a process like learning organizations, always learning and upgrading. They must be updated with market trends, new products, new demands and they must control costs, prices and margins. Resuming, they need to have an effective process called competitive intelligence.

We are in the Knowledge Era and in a globalized world, so the horizon of business changed radically in the last two decades. Companies that did not follow this trend, resting in the old market share already achieved, will be vanished by new entrants, new products and new ways of doing business.

Similar thought should be used by new entrepreneurs. They should explore the new technologies, Internet, social networks, blogs, chats, and so on.

New entrepreneurs need to create competitive advantages with these new technologies to enter and enlarge their market, and exposition. There are plenty of tools, at a low cost, and also free, already available on the web.

Last thoughts, develop a consistent strategic plan, take care of day-to-day operation, and make a continuous follow-up and control. Take some time, but chose the right people to the right place. Be always near your collaborators, hear and understand their feelings, needs and aims. Watch the competitors. Keep near of your clients, feel their feedbacks and needs. Fortune favors the bold.