There are only two reasons why any business fails, they either run out of money or they fail at achieving product-market fit. This is true for any business during any economic cycle during its lifetime. As complex as it seems, almost any cause of business failure can be traced back to the two issues. The following will give just a few causes of failure. Also remember that these events are symptoms and not illnesses themselves. In order to solve the problem other actions may be required.
Running out of money
POOR FINANCIAL MANAGEMENT
Managers have so many tasks to complete from budgeting and forecasting, delegating tasks, checking orders, and the list goes on. It’s easy to see how the simple things can fall through the cracks. Those simple things can lead to catastrophe if unchecked over time. These simple issues don’t come in the form of immediate cash shortfalls. They happen like a slow leak and eventually they erode to the core. Events like unplanned expenses, growing receivables, and late payments are often addressed after negative effects have been felt by the firm, and sometimes when it’s too late to change.
NEVER HAD ENOUGH TO BEGIN WITH
This normally happens in small businesses with owners who don’t have a lot of personal assets. This leads to a business that is constantly struggling to have sufficient working capital. They typically have trouble paying the bills and paying staff on time.
These types of companies are the most susceptible to merchant advances, or to borrow hard money funds at ridiculous rates. This compounds the problem because they pay more for these loans and have greater long-term cash shortages. They often think that cash will solve their problem, but the problem is usually another issue.
Customer service and quality have been hallmarks of marketing since the early 1900’s, when consumers first began to patronize department stores. In order to set themselves apart, companies offered better service to their customers while in the store, and soon, after purchase as well. The customization the customer expects is more apparent than ever. Fashion companies offer more styles and cuts that ever before, iPhones come in a variety of sizes and colors, and cars have special editions. If that weren’t enough, third party companies make a living offering accessories allowing for further customization for the products we buy.
Over time the American public is becoming more sophisticated in its interests and businesses need to conform. If the product or service is failing to meet quality standards for the consumer the business will fail.
Sometimes the market won’t bear another entrant and business owners enter very saturated markets with little options for differentiation. In those situations, failure comes from the lack of opportunity in the market. If you combine a lack of opportunity with insufficient cash flow or poor management, you end up with a recipe for disaster which ends up costing it’s owners long term.
LACK OF MARKET INTEREST
The last product-market fit issue we’ll discuss is the lack of interest from the market. Usually characterized by a “Field of Dreams Mentality.” The Field of Dreams Mentality” is one where the proprietor or a product or service believes that all they need to do is bring the product or service to the market and the customers will come. They believe that the need is so great that all they have to do is show up and the customers will find them. Unfortunately, that is never the case, and businesses owners and managers need to relentlessly review the perceptions of their customers in order to achieve the desired results. A failure to understand your customer’s desires, eventually will result in a lack of interest from the market.
Product- Market fit is also a cause of running out of money, which is the eventual cause of failure. To prevent these events proper planning and market research is required. Owners and managers need to hire the right staff and engage the right professionals in order to make sure that the ship stays the course, or else end up with a sunken ship.