Don’t Read This Blog Post If You’re Not Ready to Learn Why Most Businesses Fail

Most business owners are going to hate this blog post. They are not going to like what they read. Hopefully, the title will keep those business owners away.

Why is this blog post not for them? Because most people fear change. That includes business owners. Some business owners would read this post and know they should change, but they still wouldn’t do what it takes to make change happen.

Sadly, those business owners will likely eventually learn the truth. Luckily, you’ve decided to learn now how exactly most businesses fail. With that information, you can create a more strategic plan that will help your business succeed longer and be more profitable.

Most Businesses Will Fail

First, all entrepreneurs should realize that most businesses will fail eventually. And that means that a lot of businesses fail each and every year.

No business owner wants to hear that, but it’s true. Some businesses find a combination of skills and circumstances to survive for centuries like CIGNA or DuPont. Many small business owners would be happy to survive just until retirement.

The reality is many businesses will not last more than a few years. According to the US Department of Labor, roughly one-fifth will fail in one year. Beyond that, the picture gets even bleaker.

Graph of Survival Rate of Businesses in The United States (21 Years)

Looking at the graph, you’ll see that more than half of all businesses will fail within five years. Roughly two-thirds will fail within ten years. And four-fifths of businesses will fail within twenty years. Those aren’t the best odds, especially if your livelihood relies on your business surviving.

So why do so many businesses fail? And is there anything business owners can do to increase their odds of surviving? The answer to both is a firm yes.

Why Do Most Businesses Fail?

Businesses fail for a lot of reasons. Some reasons are totally crazy and practically unavoidable, but most are not. Most are directly related to the actions or inaction of the management team or ownership of the business.

Dr. Christoph Lymbersky, conducted a study entitled “Why Do Companies Fail” in 2014 and interviewed 405 managers and restructuring experts. The top three causes of corporate crisis they experienced were:

  1. Management held onto strategies (that don’t work),
  2. Management did not want to adapt, and
  3. Management had no vision.

Those three causes were all seen more than half of the time and they all involved management. And for most small businesses the owners either are the management or they lead the management.

When the experts were asked to pick the most common business areas that cause a crisis, the top 3 were: corporate strategy (45%), internal communications (30%), and marketing (24%). The bottom 2 were controlling (12%) and finance (6%).

Worrying About The Wrong Things

These numbers show that most novice entrepreneurs are worried about all the wrong things. Many business owners incorrectly predict where the risk is in running a business. They think are trying to play it safe by not giving up control to employees or not wasting money on marketing.

People Regret the Things They Don’t Do

In life, people don’t regret the things they do. They regret the things they don’t do. And it’s very similar in business. Business owners should often do the things they fear they will regret. They will very likely not regret them.

An article in Entrepreneur tells the story of the Google founders hiring an experienced COO. They were initially opposed to the idea. Advisors told them it was the right move. Once they started interviewing, they made a gut decision to hire Eric Schmidt.

Often business owners have the right instinct, but then they fail to trust their gut. Do the due diligence and listen to advisors and other experts, but ultimately every entrepreneur must trust their gut in a lot of situations.

What Entrepreneurs Do Regret

When owners don’t take the strategic risk of hiring employees and spending money on marketing, they often do regret not taking those actions when they are doing the postmortem on their failed business.

And the data from the “Why Do Companies Fail” study backs this up. Controlling was rarely an issue for companies. And controlling is basically just a managerial function that you could loosely describe as overseeing employees to ensure they perform well.

Likewise, finance was even less likely to be a crisis causing issue. So business owners should not worry about wasting money as long as it’s strategic. They should focus on investing money on the things their business does need, like strategy and marketing.

How to Focus On The Right Things

To avoid wasting energy on the wrong things, focus on the right things. Here are two key takeaways that all business owners can use to align their actions to the best interest of their business:

  • Focus on the important parts of business like strategy, vision, and marketing. Spend the minimum amount of time on the wrong things.
  • Trust gut instincts when appropriate. The idea seemed good for a reason. Ambition towards success must overshadow fear of regret.

Confident, but Not Competence

Entrepreneurs are often confident people. This is a super important trait to have in business. As an article in the Harvard Business Review (HBR) said, “Very few people succeed in business without a degree of confidence.”

However, there is also a danger when you are too confident without yet having the competence needed to succeed. The HBR article also says to “be honest with yourself about what you know and what you still need to learn.”

Lack of Business Education or Experience

The study by Lymbersky, mentioned earlier, found that in 30% of business crises the management was not well educated in business. And this makes sense. Less business savvy people are more prone to focus on the wrong elements of running a business.

The 30% may seem surprising, but according to an article by CNBC only 44% of business owners have a college degree. These business owners should embrace their lack of business accum. By accepting that they don’t know what they don’t know, they can more easily learn from or hire experts to fill in the gaps.

One entrepreneur, Amy Freeman, told CNBC in that article that she had to learn aspects of business like marketing sometimes through painful lessons. If she would have had formal education she says, “I would’ve known how to build that structure.”

Entrepreneurs shouldn’t be afraid to admit what they don’t know. Most are not attorneys or accountants. They’ll probably need help incorporating or doing their taxes. Others may turn to a marketing expert to learn more about the depth and breadth of the key business concept of marketing.

Confidence Can Obscure What Matters

When confidence goes awry, business owners overvalue their successes in easier or less dangerous aspects of running a business. This, in turn, influences their decisions about other more big picture aspects of running a business.

For example, the study by Lymbersky showed us that management and financial issues are rarely the reason a business fails. For small business owners, it’s even easier to avoid these problems.

In terms of management, small businesses have a flat management structure with few employees. Leadership is important here, but management not so much. Similarly the finances of a small company are rather simple. Any financial failure in that type of situation would more accurately be ascribed to a lack of strategy or planning.

Small business owners are often also hyper focused on avoiding problems in those areas. But they are missing the forest for the trees. That is to say, they ignore business basics like strategy and marketing. Unfortunately, those are the primary reason for why businesses will fail. Ignoring them will likely mean your business will fail, especially on the 5–10 year horizon.

And it’s not even that many of these business owners are bad per se at business. You can be good and still fail in business. As we mentioned earlier, 1 out of 5 businesses fail in 10 years. You can’t just be average, or even slightly above average, to make it in the long run. You need to be in the top 20% at business.

Misunderstanding Strategy and Risk

Most business owners do not understand risk or strategic risk. They are risk averse and think risk is inherently bad. This leads them to think risk should be avoided. They believe by not strategizing or acting, they will somehow avoid risky situations. In reality, this strategy can be just as bad as, or even worse than, being overly risk seeking.

Risk is not something to avoid as an entrepreneur. It’s something to monitor and to manage. You come up with a strategic plan for your business, and you have to accept the strategic risk that your plan may be wrong. Hopefully, you are right, but the strategic risk is part of being in business.

Running a business has an element of gambling to it. Each and every decision a business makes has a certain chance of helping or hurting the business. It’s never a sure thing. But if you want to succeed in business, you still have to take the gambles that you think will pay off.

This is why strategy is so important in business. Each business needs to plan what kind of bets it’s going to make. A strategy of not strategizing is in an of itself a strategy of sorts. It’s just a strategy where the business is clueless to the strategic risks entailed.

Lack of Appreciation for Opportunity Cost

Many business owners also do not understand opportunity cost. The Concise Encyclopedia of Economics defines opportunity cost as “the value of the next-highest-valued alternative use of that resource.”

Put simply, opportunity cost is the idea that there is a cost to every action, even if it’s not a monetary cost. That opportunity cost is the value of the things that could have been done instead of the action that was taken.

Failing to appreciate this concept is another reason some business owners focus on the wrong things. This is especially true for entrepreneurs who tend to be perfectionists, micromanagers, or even just detail-oriented.

As an entrepreneur, you need to be spending as much time as possible on the big picture of your business. Early on, business owners obviously also need to work on execution too, unless they are lucky enough to start with a large team. The key is to focus on the highest level tasks.

Some of the worst examples of this are when business owners take over tasks their employees could be doing. What usually happens is the employee is never trusted with the task. Or the employee is given the task, but don’t do it exactly 100% the right way. Instead they do it 80% correctly.

A business owner then needs to decide if it’s worth the opportunity cost for them to do that task instead of their employee. All too often, the owner over values the importance of that extra 20% and undervalues the value of their own time.

This is a huge recipe for disaster. Each task that can only be done by the owner, drastically reduces the potential that the business will grow and succeed. Because the owner only has so much time. You can’t hire more owners; you can only hire more employees.

As a business owner, you must be able to relinquish control. This is true even if the business owner can do everything best and no one else can fill their shoes. Getting a task done in the 80% range is more than enough for most minor or less important business tasks.

The business owner needs to focus on the minority of super important tasks that drive more revenue and higher profitability. These are the tasks with huge rewards when done just a little bit better.

The worst thing an entrepreneur can do is do all of tasks they can do best themselves. It’s the fastest way to kill a business. It ignores all of the opportunity costs. Plus, they no longer do any of the tasks best, because they have too many tasks.

How You Can Avoid Failure in Business

There are so many ways a business can fail. It’s impossible to list them all. For that same reason, it’s impossible for a business owner to prepare for them all.

Lot’s of businesses fail. Most of the time they don’t fail because an entrepreneur failed to predict some low probability event. Most of the time they fail because of a simple lack of focus on the basics of business like strategy and marketing.

Novice entrepreneurs spend all of their time focusing on preparing for every negative possibility within their business. This is a great instinct, but it also has diminishing returns.

They also often see marketing as too expensive. They don’t focus on things like strategy and vision. They worry and over prepare about low risk events. They also ignore the opportunity cost of engaging in menial tasks.

Next level entrepreneurs focus on the big picture. They spend their time on strategy, planning, and the tasks that increase revenue and profit the most.

These entrepreneurs deeply understand the intersection of marketing and business. They don’t fall for the hype that some marketing gurus teach.

They don’t spend time doing tasks other can do almost just as well. They are able to give up control. They don’t worry about minor mistakes employees make that don’t affect the bottom line.

What kind of entrepreneur or business owner are you? Do you think your focused on the right aspects of your business? Have you ever experienced a business failure, as an employee or an owner? Did we miss any important areas you do need to keep an eye on as an entrepreneur? Let us know in the comments. We’d love to hear from you.

 

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