Business Failure: 10 Things An Entrepreneur Must Do To Avoid It

Reading Time: 8 minutes


No entrepreneur wishes to start a business that will fail.  But the incidence of business failure is a reality.  According to statistics 8 out of 10 new businesses fail within their first eighteen months while only about 30% of them survive their 10th anniversary.

Economic challenges and bad government policies are some of the excuses an average entrepreneur will give to rationalize a business failure.  It is okay to blame the environment but the truth is that many businesses fail not because of external environmental factors. 

A business will fail if the entrepreneur did not put processes in place that will ensure the survival of his enterprise.  Sometimes it is due to lack of knowledge, some other times; it is simply careless business mistakes.

Business Failure: 10 Things An Entrepreneur Must Do to Avoid It highlights those business practices that every entrepreneur must adopt to ensure that his business does not fail and these are:

#1        Choose the right business – Some businesses begin to fail from the ideation stage.  A poorly conceived business idea will definitely run into trouble in no time.  Many entrepreneurs end up with bad businesses because they did not validate the idea before setting out. They drift from one idea to the next until they happen to stumble upon one that strikes their fancy.

Deciding on a business idea has to follow a thorough and systematic process. Being thorough means that you have to consider a number of options, conduct extensive research, examine your capacities in line with the dictates of the proposed business and ascertain its market acceptability. To be systematic requires that you rank the many ideas before settling on one with the highest chances of success.

#2        Don’t Start Your Business without a Plan: Many entrepreneurs do not realize the need for a business plan until they either run into trouble or need to borrow money from their banks.  Even at that, a lot of other entrepreneurs see business plan as a mere document required to fulfill all righteousness.

A business plan is one of the most important documents you should have as a small business owner because it collates all the critical decisions you will make in your business.  It doesn’t need to be very long or filled with graphs and tables or all that high sounding jargons. 

It can be a simple one-page document that articulates your thoughts about your business: the concept, the product or service, target market, the competition, operations model, financial objective, funding needs and expected key accomplishments. 

In a nutshell, it is your own way of writing down where you are starting from and where you want to get to in your business.  You shall keep referring to this plan in the course of your business to be sure that you are progressing according to plan.  It helps you to spot deviations on time and take immediate steps to steer your business back on track.

#3        Don’t Mix Personal Finances with Business FinanceMany entrepreneurs do not separate their personal finances from their business finances and this is a very poor practice that can deal your business a fatal blow. 

In principle, your business is a separate entity, distinct from you the owner, having its own life, assets, and liabilities.  Indeed, a business owner is regarded as the last creditor to the business who expects to be paid back his invested capital plus some returns in terms of profit. 

When you mix business finance with your personal or family expenses it becomes difficult to ascertain the profitability or otherwise of your business and you will soon run into trouble with the tax man.

The first step is to have a business bank account different from your personal bank account.  All business revenue and expenses pass through the business bank account while your personal bank account caters to your personal and family expenditure and income.

The next ideal step is to pay yourself a salary and develop the discipline to live on that salary on a monthly basis as you would if you were on a paid job.  Doing this will prevent you from regularly dipping your hand into the cash box to meet personal expenses.

As a small business owner, it is difficult not to use personal assets for business purposes and vice versa.  Track such shared assets and endeavour to allocate cost to the business for using sharing the asset.  Some of these shared costs include the use of your personal car and mobile telephone call charges.

#4        Keep proper accounting records:  Many entrepreneurs don’t keep records! Not keeping proper records of revenue, income and expenditure kill a business very fast.

You will realize the damage you are doing to your business when you are confronted with tax issues or when you need external funding or bank borrowing.

In any case, proper book-keeping is a legal requirement for businesses and you will not only be saving yourself some troubles but money by keeping good records.

Keeping proper records need not be a problem. Simply develop a system that works for you as long as you capture and track revenue flows, expenses and a documentation of other non-financial events in your business.  Such information should be adequate enough to enable you to review your performance and take action on a regular basis.

To do it properly, engage an accounts personnel to handle the financial sides of your business. You will be glad you did.  In engaging an accounts personnel, consider technical capacity, integrity, and honesty.

Keeping accounting records gets easier with the many accounting software in the market.  There are free accounting apps available online you can use to get started.  Review as many as you can and decide on a suitable app for your business.  As your business grows and transactions volume increases, you can then implement a more robust accounting system to meet your needs.

#5  Manage Your Cash Flow Properly:   This has to do with how the entrepreneur manages money to ensure that there is always cash available to meet current obligations.  Cash is the live wire of any organization and if not properly managed can spell doom to the organization.  A certain US Bank study showed that 82 percent of cases of business failures are due to poor cash management.

A proper cash flow management process will result in positive cash flow and the reverse will result in negative cash flow.  Positive cash flow occurs when you have more cash coming into your organization than going out and a negative cash flow means you have more money going out than is coming in.

While a positive cash flow ensures that your business is liquid at all times, negative cash flow is a sign of trouble because soon you will be unable to pay your suppliers, contractors, salaries and meet other current expenses.

Negative cash flow may not necessarily mean that your business has failed when it set in but is a warning sign that something must be done as soon as possible to avoid disaster.  It may be your money is tied up in the hands of people who buy from you on credit or in a fixed asset that is not yielding income.

Ensure positive cash flow by putting system in place that ensures you have fewer debtors, sell more in cash than on credit, chase your debtors soon enough before they become too comfortable with owing you, invest less in fixed assets (why buy another van when one is enough for your level of operation) and know that there is a difference between profit and cash flow so that you don’t get delusional and begin to take money out of the business believing that there is so much available.

A major reason why some entrepreneurs fail in point #4 and #5 is because of a lack of financial knowledge.  So try to get some financial knowledge; training in basic accounting will help you a great deal in managing your business better.  Fortunately, there are good places you can get such training online for a small fee without leaving your office or home.

#6  Invest in the right product:  Isn’t this explanatory enough? Of what use is it to sell a product that people will not buy.  It is the sales that bring the cash and it is the cash that keeps you in business. Therefore before you even open your doors for business, do an extensive market research to ensure that there is a market for your product, there is a demand for the product or the service you want to render.

In his book, Small Business Big Money, Akin Alabi, the founder of advises that for a business to thrive, the entrepreneur should invest in a product or service that people want to buy and not necessarily what people need. 

Once you offer people what they want to buy, your business will continuously bring you money.  So the rule here is don’t create a product and then look for customers, discover what people want to buy and then create a business around it.

The book Small Business Big Money is a recommended read for small business owners and aspiring entrepreneurs who want to confront the brutalities of doing business in Nigeria head on.

Buy Small Business Big Money.

#7   Hire the right people to work with: Be they your employees, partners, consultants, and contractors – you will always work with people and the quality of people you work with will impact on your business positively or negatively. The mistakes most new entrepreneurs make is to hire people to reduce cost. While it is important to be conservative, there is just no way will you get quality people to work with if you do not compensate them well. 

Compensation here is relative for it does not necessarily to be money.  When you get a good staff that is adding a great value to your organization, look at the intrinsic things that motivate him and arrange his reward to include those things.

#8   Poor Leadership:   This is another important reason why small businesses fail.  To succeed in business you must develop the necessary competencies to provide leadership to your team.  Leadership has been defined as the ability of a person to get others to follow him with confidence and keenness.  People follow you and are willing to do what you desire if they believe in you and your capabilities. 

While you are not expected to be a master of all, you will be creating confidence and keenness if your workers know that you are informed in major areas of the business: finance, purchasing, sales, production and managing employees.

Though entrepreneurs do not often realize it, one challenge in running a small business is in the area of managing people. Good people management will ensure you have a crop of a highly motivated workforce who will work with you as partners on a long time basis.  Start by hiring people who love what you are doing, treat all fairly without bias or preference to any and communicate effectively.

#9   Inadequate Funding:   One of the biggest challenges an aspiring entrepreneur faces is how to raise adequate capital to start or even run an existing business.  No matter how exciting your projections are or how profitable your business seems to be, you will always need money to sustain the business.

Identify in your plan how much you will need at each stage in your business cycle and work towards raising the required capital to support each stage of growth.  How to raise capital need not be a big challenge if you know how to go about. There are different sources of capital you can explore – government agencies, angel investors, venture capitals, and NGOs.

The challenge is that many entrepreneurs do not know how to organize their businesses to meet the criteria for funding by these organizations. In Nigeria, there are a number of intervention funds established by the government to provide funding for small and medium enterprises you can easily access if you meet their criteria.  Your responsibility is to identify these funds and prepare your business to qualify for their programmes.

#10   Overtrading Overtrading is a common problem with startup and the reason why so many promising businesses have gone under.  It occurs when a company expands so rapidly that its working capital is constrained.  Usually, a man commences a new business and within a short period of time, he surpasses his projections, making more profits than ever expected. 

He goes on to open branches within the first or even start up new lines of business and become a group of company.  He changes his title to Group Chief Executive.

Before the entrepreneur realizes it, his business is facing liquidity challenges and gradually branches are closed, the new lines are wound up and eventually, he is completely out of business.

Business expansion is good but it has to be carefully planned and executed.  The ideal thing is to consolidate on existing structures as your business gains traction and gradually expand organically.  That way you are able to match expansion with your cash flow.

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