Reasons Businesses Fail and How to Avoid Them

September 28, 2020

Reasons businesses fail range from small to obvious. Learn how to avoid the different reasons some businesses fail and the solutions.

A business with a "going out of business sign" on it
A caution sign that says, "watch your step"

There are many reasons businesses fail but there are some traps that are easier to fall into. Whether you’re a new business starting out, or if you’re an established business trying to avoid failure, it’s important to understand the reasons businesses fail. Learn from other’s mistakes instead of making your own.

We’ll also cover how you can prepare for or avoid these traps. If you’ve already suffered, there are changes you can make to repair some of the damage. Overall, the more you know about why businesses fail, the more you can do to prepare yourself and avoid the same fate. Read on to learn common reasons businesses fail and how to protect your business.

Sales-Related Reasons Businesses Fail

Sales are an important part of any business. It’s how you earn the revenue you need to survive and grow. There are some major mistakes you can make during the sales process that can eventually lead to your business’ failure. With so many factors involved in running a business, it’s no surprise that things can easily go wrong. First, we’ll discuss the sales-related reasons businesses can fail and we’ll start with target audiences.

Missing Your Target

Being a successful business is all about connecting with your intended audience. Your main objective when starting your business was likely finding a solution to a problem your audience has. This isn’t enough though. The next step, of course, is making your audience is aware of your product or service. You can have the greatest product in the world, but if nobody knows about it, it’s pointless. If you feel like you have a great business, but you’re not as successful as you should be after doing some research, you’re probably missing your target audience.

One of the reasons businesses fail is by missing their target audience.

So, the first step is learning about your target audience. Not just who they are, but how best to reach them. This information can also help you develop the types of marketing material your business will need to communicate with your audience. If you’re not sure how to find your target audience, look for a marketing advisor that can help you out.

Communicating with your audience means explaining to them why they need your product or service. Find the “pain points” your potential customers care about and tell them how you can resolve those pain points. This will help your target audience see the value of your business. Ignoring the importance of this step can lead to product failure. Now let’s see how not showing your value can also lead to business failure.

Not Showing Your Value

What does everyone seem to look for while shopping? Value. Failure to show their value or offer true value is one of the reasons businesses fail. Of course, your goal as a business owner is to make a profit, but don’t let that overshadow your business’ mission. If your business doesn’t have a mission statement yet, here is the definition from Entrepreneur online. You’ll need a mission statement for your company.

A hot air balloon in the sky with arrow-shaped clouds and the words "aim high."

Overcharging could work for a short time, but eventually, customers will catch on and your business will ultimately suffer. In short, this mindset isn’t plausible for a long-term business. So rather, make sure your customers not only see your value but that you offer it to them at a good deal. After all, you’re supposed to be giving or providing something that will make their life easier.

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Another tip – aim high. Rather than underperforming or falling short of their expectations, ensure it’s always the opposite. Give them high expectations for your business in the future. If you impress them, they’re more likely to return and spread the word about your product or service. Free marketing -that’s a win-win for both sides.

Not Creating An Effective Sales Funnel

Your sales funnel is the lifeblood of your revenue stream. Failure to create or nurture a sales funnel is another one of the reasons businesses fail. If you’re not sure about your own funnel or what this term even means, here is a brief explanation.

The general idea of the sales funnel is to take all of the potential customers seeing your product and turn a certain number of them into actual buyers. There are steps within the buying process that filter out some of those in your funnel. The reason being one factor – time. Most people aren’t going to make purchases after the first time seeing your website. It takes most buyers further research and some serious thinking before actually purchasing a product they’re interested in. This is exactly why so many companies have a ‘list’ or ‘favorite’ option so that you can save the products you’re interested in to evaluate later.

Luckily, there are things you can do to help potential buyers within your funnel. Certain types of marketing “touches” like email campaigns or check-ins can keep you fresh within your potential buyer’s mind. Helping them along this process means more fulfilled purchases. Remember, there are plenty of other opportunities for your prospects to change their minds or purchase elsewhere, so stay visible.

On the other hand, there are also things you can do to hurt potential buyers within your funnel. This is why your sales funnel is so important and can be one of the reasons businesses fail. If you’re sending materials at the wrong times or sending too much material, you can scare a potential customer off. If you’ve already made this mistake, try offering a discount or something enticing enough that they forget your annoying behavior. Then, of course, finish this article and give your sales funnel a good look-over.

A graphic illustrating a sales funnel, with clients at the top, moving downwards through it. Reasons businesses fail include not creating an effective sales funnel.

Structure-Related Reasons Businesses Fail

Along with the sales-related reasons businesses fail, there are also internal problems that can lead to failure. You need to keep an eye on how each piece of your business functions. If a stressor appears in an area of the business, it’s vital you address it. Ignoring it is like leaving a nail in your tire – eventually, it will run out of air and you’ll be trapped. Now that you understand the importance, let’s look at a few of the structure-related ways businesses fail.

Keeping Poor Management

We’ve explained the consequences of bad management before and the importance of good management. Poor management can certainly take down a business, especially smaller businesses. Poor management can slowly poison the rest of a team and company. So if you’re aware of any issues with management, you must fully address it – quickly.

If you don’t, this just communicates to customers and your team that you’re okay with this behavior. Whether or not it’s true. It can also run off the good employees in your company and increase turnover in general. Eventually, everyone and your business will suffer.

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If you’ve had issues with poor management it’s not too late. Although it’ll be more difficult the longer you let it go on, you can recover from poor management. The good news is, once you’ve mended the issue and make positive changes, it’ll be harder to fall back into. And, you’ll have learned the signs and remedies for poor management.

Poor Business Planning

Understandably, not having a solid business plan in place can ultimately lead to business failure. If you’re just starting out, know that your business plan is the foundation of your company. It needs to include absolutely every aspect of your business so you’re prepared and ready for the different challenges and changes of business. This article explains why your business plan is so important, and what to include when writing your own plan.

If you already have a running business and don’t have a plan, it’s not too late! If your business is up and running, you likely have an unspoken business plan for the most part. So the hardest part is taken care of and the next step is just writing it down. You can consult with an advisor to review or create your plan from scratch so you know it’s great.

Failure to Plan Financially

reasons businesses fail broke

Along the same lines as poor business planning, is failing to create a fully-detailed financial plan. This is especially true for small and new businesses, particularly with the climate of our current economy. COVID has thrown some serious financial wrenches, even to those with a financial plan. This brings up an important point – that even plans need backups.

When making your financial plan, guess high for costs rather than low. Having leftover money within a budget is certainly nicer than consistently not having enough. If you’ve made a financial business plan but can’t seem to meet it, then your plan needs some serious adjusting. In this article, we outline how to create a proper business budget. If math is not your strong suit and you’d rather have a professional doing it, hire a CPA or Financial Advisor.

Try, Try, Again

The point of knowing the reasons businesses fail is so you can better prepare yourself and your business to avoid these pitfalls. As long as you’re learning, at least you’re gaining something from a business fail. Also, it’s important not to give up. Even if you’re worried because most of these reasons apply to your business, you can make improvements and bounce back. Learn from your mistakes and try, try, again.

A chalkboard and a diagram illustrating retrying is written in chalk.

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