Why Businesses FailAug 18, 2022
In Australia, 1 in every 3 small businesses fail within the first year of operation. There can be a lot of uncertainty as to why or more importantly, what a business owner can do to prevent it from becoming a reality. Here are 3 common reasons as to why this happens. The first is a lack of funding or working capital, primarily due to wrongly pricing your product or service. The second is a lack of business planning and the third is a lack of an effective management system.
1. Lack of funding or working capital (wrongly priced product/service)
If you don't have enough money to meet the daily financial needs of your business you're on track towards business failure. This is why it's important to ensure all of your businesses finances including payroll, rent and utilities are accounted for and paid on time. One reason that stands out for a businesses lack of funding is that it missed the mark on pricing its products and services. Small price changes can raise or lower a business's profitability by as much as 20% or 50% studies show. So, how can you prevent this from happening? By consistently conducting market research to properly position your product or service so that it is most attractive to the market.
It's important to note that market research can be used for helping you make new decisions, but it also can be used for confirming or rejecting decisions that you've already made.
Whilst the best pricing data is from experimenting with price with your customers. Start with a sustainable base price before jumping into strategies. You can do this by adding up all of your costs that were involved in bringing your product to market and positioning your profit margin above those expenses.
Next, consider your pricing objectives. Here are several examples:
- Positioning yourself in a certain place in the market
- Improving retention remaining competitive
- Shifting brand image
- Increasing demand
Once you've decided upon a pricing objective(s) that's right for your business start to think about your pricing strategy.
Several types of pricing strategies include:
- Cost-based pricing strategies: Going rate pricing.
- Competition-based pricing strategies: Value pricing and premium pricing.
- Value-based pricing strategies: Penetration pricing, skimming pricing and loss leader pricing.
Corporate Finance notes that “when determining a pricing strategy, it is important to consider the business’s position in the current marketplace. For example, if the business is advertised as a high-quality provider of mechanical equipment, the product pricing should reflect that.” Be open to changing your price depending on the current market.
2. Lack of effective business planning
Planning will assist you to make calculated decisions and prevent mistakes from happening. A business plan gives a clear indication of your vision for the business and its current situation to all stakeholders. When businesses fail to communicate and create a clear and effective business plan they will suffer greatly.
“Most people don’t plan to fail, they fail to plan.”- John J. Beckley
At the minimum, a business plan should include:
- A SWOT analysis
- Current and future needs of management and employees
- Capital needs, including a projected cash flow and various budgets
- Marketing initiatives
- Analysis of competitors and their strategies
It's important to note that before you start your business plan you need to fully understand who your customer is and what their pain points are to reassure that your business plan is of value to them. Have empathy. Your business plan is their solution to their pain points and the logistics of how it will be done.
3. Lack of effective management system
A great management system accelerates business performance and instils a sense of continual improvement and strategic decision-making. Without an effective management system, you'll encounter a high turnover rate, loss of clients, lack of productivity and operations will suffer.
There's a lot of movement to keep track of when running a business: promises to clients, teams to organise, curveballs to dodge and the need to stay competitive within the market.
ISO 9001 is a systematic approach to business management and improvement which is internationally recognised. This management system proves to your customers, regulators, suppliers and competitors alike that your organisation is committed to continuous systematic improvement. It's not about checking things off a list and more so about walking through your business to see where improvement can be made, so your company is a better place to work for and the best choice for your clients.
It's not easy when you've got a lot on your plate to see things that may need to change. You've heard that saying, "when you're in it all the time, it's harder to see" or "you've got your love goggles on". Having a third party take a look at your company from the outside can offer you insights that you wouldn't have necessarily thought of and guide you through the process of change/ improvement. Change can be neglected and intimidating when you've got a million other things to do. However, it's change and impactful improvement that will see large results.
Do you have the right people in the right seats?
Find your A-Players, Level Up B-Players and Make a Decision With C- Players. One of the most common problems people come to me with is attracting the right people and retaining A Players. A-Players will want to work on themselves without you even asking.
If you're interested in attracting A-Players check out my article, "Scaling Up: The People In Your Organisation."
All budding businesses need GREAT salespeople. If that's not your strength as a manager you'll need to upskill yourself in sales. Everything is sales! Every time you sell an idea to a person- that's sales. Invest in yourself and find a team that does the same.
On a final note, it's good to remember that failure is never a complete end. It can be absolutely heartbreaking for a business to shut down- you've nurtured it. It's like your baby. However, you will have valuable knowledge gained from failure that will contribute to your success in the future. It's more important to fall in love with the process of building something, so it'll be easier to build things back up when they fall. Furthermore, the best way to learn is to fail fast so you can quickly pivot. Finding great mentors will guide you along your path and also teach you the mistakes they've made, so you can feel more confident in your journey.
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