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Eight reasons why businesses fail
Written by Bulelwa Mdanyana
4 November 2012

According to the Head of ABSA’s Small Business unit, up to 63% of small businesses in South Africa fail within the first two years of operation. When you're starting a new business venture, you obviously have a lot things going through your mind and the last thing you want to focus on is failure. Given the high probability of failure, it would only be prudent to address the common reasons for business failure up front and know what to avoid.

Business people who have had to close down their businesses will tell you different reasons why they had to close down – some will say there’s not enough support from the government, some will tell you it’s their clients who don’t pay on time and  others will blame their business partners. While these reasons may be valid, it is important for business owners to acknowledge that some of their actions and decisions they’ve made are the ones that lead to their businesses closing down.

Besides the usual culprits, here are eight of the reasons why business’s fail:


1.    You start your business for the wrong reasons

Of course you cannot start a business without the intention of making money; however that can’t be your only motivation. It is also not enough to start a business because you do not want a boss - if your sole reason for starting a business is that you wouldn't have to answer to anyone else, you will be disappointed. The entrepreneurial path can be very lonely and requires someone driven by passion and a strong sense of purpose - money and independence will always follow.  


2.    Poor Management

Many reports on business failures cite poor management as one of the primary reasons for failure. New business owners lack relevant business and management expertise in areas such as finance, purchasing, selling, production, and hiring and managing employees. Unless they recognise what they don't do well, and seek help, business owners may soon face disaster. They must also be educated and alert to fraud, and put into place measures to avoid it. An entrepreneur must find ways to fill the gaps in his expertise and a board of advisors is just one way to get around this. 


3.    Poor location

Location is critical to the success of your business. Whereas a good business location may enable a struggling business to ultimately survive and thrive, a bad location could spell disaster to even the best-managed enterprise. Choose the best location for your clientele. This is of course dependant on the type of business – it is particularly important for retails businesses, however the choice of location for an administrative or operational centre also leaves an impression on your clients.  


4.    Growing to quickly

It’s every business owner’s dream to grow exponentially within a few months of exception; however a business can grow too fast and not have the resources to support that growth. Overexpansion often happens when business owners confuse success with how fast they can expand their business. I know a business that started out very well but they expanded to all the major provinces in a very short space of time – and today that business is nowhere to be found. A focus on slow and steady growth is optimum.


 5.    Poor execution 

Poor execution is the downfall of most business start-ups. You should conduct an honest evaluation of your skills and only pursue opportunities that are aligned with your strengths. Those who are blinded by greed and arrogance are more prone to getting in over their heads. It's also wise to surround yourself with talented people who aren't afraid to speak up when you're headed to the wrong direction. 


6.    Poor planning

If you don’t know have a clear picture of where you are going, you will never get there. A lack of vision is a dangerous thing for a business.  The business owner must be able to plan everyday tasks to grow and be successful. It is important to actively work on your business. As they say, failing to plan is planning to fail. 


7.    Overdependence on a single customer

Pay attention to your revenue sources. If you have a customer that is providing a majority of your income, ask yourself what would happen if they left or went out of business. Where would you be? Whenever you have one customer so big that losing them would mean closing up shop, watch out. Having a large base of small customers is a safer option. 


8.    Not marketing your business

If you are selling a product and no one knows about it, you might as well start looking for a job because customers can’t buy what they don’t know. No matter how brilliant you think your product is, if you don’t get the word out there so that people can know about it, then you headed to the wrong direction. Most businesses will never advertise until it’s time to sell their failing business – it’s too late then. Draw up a marketing strategy to get the word out there and sometimes it does even have to cost you much. Word of mouth can do wonders for your business and the use of social media also provides a platform for businesses to engage with their clients. 


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