Failures are a part of everyone’s life. Similar to personal lives, businesses and organizations also face a rough patch in their success journey. These obstacles are inevitable. Many startups do not even cross the five-year mark. They launch into the business and wind up within a year due to several reasons.
According to a study, out of every ten businesses fail within the 10-year mark. They either lose up capital or lack a proper management system. However, the number of startups crossing five years is 80%, meaning 8 out of every ten businesses will continue past five years.
In India, the rates are similar. As the number of years increases, many businesses find it challenging to cope with their operational changes. This article elaborates on the ten most common reasons why new businesses fail and what a person starting an MSME business should avoid doing.
10 Most Common Reasons For Businesses Failing
The following section gives a comprehensive guide on different probable reasons for why many startups fail to cross 5 or 10 years.
Low Value Offering
It is proven that great businesses deliver an exceptional level of value and satisfaction to their target customers. They promise and deliver the value as expected. Startups often fail because they over-promise the customers and deliver value below expectations.
Over-promising and under-delivering the value is a common reason for businesses failing nowadays. This value creates hype among the people. It creates awareness, leading to more significant earning potential. Therefore, adding value is important after creating a buzz in the market.
After the buzz creation, people will start comparing the existing product of the competitors with the new arriving product of a new business. While they compare value, it becomes challenging for the latter to rise. Therefore, it is recommended that budding startups under-promise and over-deliver the product or service.
Losing Out On Target Audience Expectations
Every business starts its planning process with adequate market research and filter process. One of the most vital areas of this market research is the STP process – Segmentation, Targeting, and Positioning.
After creating different segments, entrepreneurs select a segment that will be the potential customer base for the business. This segment is known as the target market. The product or service is developed around this target group. The central business operations revolve around this focus group. If businesses fail to satisfy their target customers, their profitability will start dwindling.
Startups do not ascertain their target group accurately, which is the primary cause for most businesses failing. Businesses should try to address the customers’ pain points, failing to lengthen the business growth.
Imbalance Between Cash Inflows & Outflows
One of the most apparent reasons for winding up the business is running out of cash or capital. The primary cause of this problem is poor cash inflows and outflows management. Many budding business people lack financial management in practical life, resulting in a high imbalance between inflows and outflows.
In a short span, enterprises can afford to pay more than earn. But when less income and high expenses are persistent for a long duration, businesses are forced to exit the market. Startups are advised to study the cash balances regularly to avoid any last-minute poor financial framework.
Internal Conflicts & Human Resource Management
When a business starts its operations, employees take time to gel up with the co-employees and the work. As soon there is proper coordination among different levels and employees, enterprises work more effectively and efficiently.
Contrary, when employees find problems internally or have personal disliking towards another employee for any reason, organizations will face unwanted results, including employee termination, poor growth, lower productivity, voluntary retirement, etc. These all results force businesses to exit the market.
Organizations should involve employees in induction programs, have informal sessions, appreciate and motivate employees, create feedback mechanisms, etc., to avoid workforce problems in the organization.
Lack Of Transparency In Business Operations.
Customers buy more when there is transparency in the business’ operations. When there are not many hidden suspected activities of an enterprise, people will tend to trust the brand or business more.
Initially, many businesses try to hide their formula for carrying out various activities. In the process of hiding, people believe that there are high chances of risk in the business offerings, as a result of which businesses fail miserably.
Poor Drafting Of Vision & Mission Strategies
A business lies on some foundational principles. These act as guiding stones for businesses to start their operations in the right direction. Vision and mission statements are the core concepts every successful business takes into account.
In simple words, vision gives the business a long-term holistic goal of an organization. In contrast, mission statements give brief know-how to achieve the ultimate goal in a vision statement. When a business does not incorporate proper structuring of these statements, they lose direction, leading to immovable consequences.
Ineffective Sales Funnel Creation
Businesses need to understand the importance of the sales funnel. Many startups launch their business without planning out an impactful and consistent sales funnel. They go with the flow and realize that they are landing nowhere close to the sales target.
An impactful sales funnel helps create mutual trust and relationships between the organization and the customer. It clearly defines the flow of the profit-generating activities, thereby improving coordination among different departments.
Poor Systems & Process
Systems are processes are major constituents of a successful business. If there is no proper or consistent process for XYZ, it will lead to confusion and internal conflicts. For example, suppose an HR person is hiring someone based on past work experience and the other based on qualifications ignoring zero work experience. In that case, it will lead to internal conflicts and degrade the brand image.
Systematic processes are also necessary for escaping uncertainties in business. It helps organizations in handling pressure and problems more smoothly. Therefore, startups should establish systems and processes right from the beginning.
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An effective leader is crucial for guiding and supervising the whole organization towards a single goal. Departmental leaders should be motivated regularly in order to attain small objectives faster.
Initially, leadership does not come into action when everything goes according to plan. But when issues like demand mismanagement, changing fads, etc., arise, poor leadership can lead to unbearable results like business exit.
No Market Potential
There might be a possibility that people in a business are giving their best, but there is a problem in the product delivery. Many startups try new ideas in a potentially weak market. The product might not have a great potential for performing well in the set market.
Businesses can solve this issue by conducting adequate market research before entering the market. They should study competitors and develop a product prototype in the actual market conditions.
The reasons mentioned above are the most commonly found issues in businesses that compel them to exit. Some businesses escape these problems with the proper framework and other techniques.
Platforms like MSMEX are great options where experts share their knowledge in setting up new organizations and tackling various hurdles in succeeding. MSMEX professionals have helped more than 5000 businesses to excel in their respective industries like agriculture, food, chemicals, automobiles, etc.