Why do 9 out of 10 businesses fail anyway?

[nix]

It's true, most businesses fail after their first five years of operations. In the Philippines, the statistics may even be worse due to the economic crises. Why do you think there are so many failed start-ups?

[Rockgardener]

Restaurants, bars, disco's etc...they all
have to pass as a 'trend' first,.. but even
if you succeed as a trend, there are even
tougher sea's ahead as far as getting
people to come back.

[jack]

basic mistake ay ang sa planning and research. most of the time, these are the steps that are taken for granted.

[KuyaDanny]

Entrepreneurs tend to get emotionally involved with the businesses they create. That's human nature. Unfortunately, they sometimes love their businesses so much they forget to look at the downside. A lot of times similar businesses have failed before, yet new entrepreneurs do exactly the same thing on the gounds that "I can do it better than they can."

[nix]

-- Lack of a competent team.
-- Lack of chemistry among team members.
-- Assumptions were too bloated in the first place, and the entrepreneur was easily discouraged.
-- Crowded market for the service or product that the idea offers.
-- Absence of market for the service or product that the idea offers.


Chances are, a lack of proper cash management skills is what leads to a businesses' downfall.

[Gilbey]

there are a lot of reasons but in the first place... there should have been a feasibility study... most businesses are placed with studying the related risks...

some people look at some businesses and if works they simply start something similar without looking at their environment! and when it fails, some businessmen are too optimistic saying they would be able to make it - saying they know the mistake and would not succumb to it!

[Assassin_Mage]

I have to agree that the lack of planning and research have resulted in the failure of most startups.

In some cases, some have opened businesses catering to a market which is already saturated. A case in point is the current cellphone business. By the end of this year, a lot of cellphone merchants (small sized ones) will be folding due to the over saturation of the cellphone market. Most will have to jack up their prices in order to turn a profit which in tutrn will cause them to lose customers and in the end stop all business all together.

The mobile phone market is very profitable indeed, but with the current number of merchants dealing in it, it is not advisable to go in as a merchant. It would be more profitable to enter as a supplier-carrier.

Main point is: check the market capability before plunging in.

[bUrAoT]

Because

- Philippine economy
- Dollar Rate
- Unprofessional Businessman
- Lack of research
- "Pwede nah yan" Filipino trait

[FAM01.02.01]

I've been doing case-studies on this for the last three years...

The rate of new business failure is not even as good as a five year life-span. Statistics show that 3 out of 5 new businesses will fail within their first three years of operation, with 1 in 3 failing in the first year. The reason? Few people when starting out sit down to right a good business plan - forecasting realistic profits, losses and start-up overhead costs. A good SWOT analysis is neccessary and even then there's no guaranteeing success.

[jopert]

Originally posted by nix

Chances are, a lack of proper cash management skills is what leads to a businesses' downfall.


this is what i fear most. i hate making wrong decisions.

anyway, lots of business shut down because of debt.

sometimes the capital cycle is too slow.

like the business of my friend. they're an applicance store.

they're losing ground because their total bad debts reached p6million!!

people are notpaying anymore because everyone's tightening their belt.

imagine that.

[aticus]

Everyone pretty much said everything. I'd just like to highlight what, in my experience, was the most common set of problems with some of the companies I've seen personally:

1) Lack of planning and market research - I'm currently helping a US company seeking to market goods in Asia. The owner is conscientiously sourcing market information on all aspects of the industry in question, including distribution networks, market share, etc, etc... Unfortunately, most Philippine businesses are not nearly as disciplined before starting-up.

2) Poor management team - Often the people with the money don't necessarily know how to run the business. They then entrust it to family members or friends (neither of which qualification is suitable for determining a management team). One of the most critical early decisions an entrepreneur must make is WHOM TO HIRE. Make the right decisions and you'll be ok. Make the wrong ones and you'll be scrambling to correct mistakes for years to come.

3) Too much monetary exposure, too little concrete reward - Too many people are investing millions on things that just won't work. Many would-be entrepreneurs like to "project" earnings, and market share, without really focusing on the important things... real products, real demand and real work. What happens then is they burn millions and have nothing to show for it in the end except the "promise" of possibly hitting it big if the "economy picks up." Let's face it, some companies couldn't be picked up even by a dynamite explosion.

4) Very bad marketing - You can have the best management team on earth, but if the people doing your marketing suck, you just won't sell any products. Often, many companies hire people on the cheap, reasoning that they would rather spend on things like R&D or advertising. Well, I'm sorry, but if your marketing group deals with clients directly, and they don't know how to market, you won't sell your products. And that's that.

5) Inability to take care of old customers - Quite often, start-ups (like web-development companies) are so focused on gaining new customers, they sometimes forget that they can generate more revenue if they provide additional services and service to their old clients. What happens in some cases, in fact, is that not only are old clients ignored as a potential future market for additional (or even recurring) goods and services, they're downright ignored period. Many businesses don't know their clients by name. Many have no clue what products they bought, whether they were happy with them, and what improvements they would want. This is the whole basis for CRM... To be able to mine vital info from previous customers to generate additional business from them and/or to more effectively source new business from people with the same demographic and psychographic information.

Bottomline... If you don't take care of your old customers, you won't be able to consistently sustain your business.

That's my two bits worth. :)

[nix]

Aticus' reasons are for highly capitalized start-ups. ;)

For mom and pop stores and mid-sized businesses, I think that the biggest reason really is a lack of market planning. Everyone takes a good idea in its simplest form, and they never expound on it from that point onwards. Also, people tend to rationalize the business case of any idea or opportunity. Risks are always placed in the backburner because of the initial excitement. :p

[misbee]

most likely, because of mismanagement.

[tazbivr]

Kill or be killed. 9 out of 10 don't have the stomach for such a way of life.That is business. I don't agree that the Philippines is any worse than other countries if we look at other countries at the time in their history equivalent to ours. Maturity as a nation takes time and blood which is exactly what we are going through now.

[GARFIELD M]

Not even a feasibility study or business plan can assure success of business..

Let us admit the fact that there are businesses which have short lives because they are affected by fad or trend. Cognizant of these characteristics, the business should have been able to recover the investment with a profit and spin off to another business...

Some of the failures are due to inability of the company to integrate backward for its raw materials sourcing or integrate forward for its channels.

Many manufacturing companies shut down due to lack of materials despite the big demand for the product...

Many marketing companies fail to distribute their products effectively and efficiently because of wrong choice of channels.

Some of them, in their desire to assure distribution, engage agents which may limit marketing instead of covering a bigger territory.

Some businesses evolved due to hobbies only and the owners do not bother to learn the rudiments of running businesses....

It can also be attributed to the gaya gaya culture of Filipinos where similar businesses compete in a very limited market....

:cat:

[Mokkori]

I'm no economist but I think that a factor can be attributed to the notion that a business cannot gain without another losing... I think that most markets are finite and when there are more businesses than consumers, businesses are bound to fail. Competition is even fiercer now as the market seems to have shrunk in many areas. Economic crisis brings about cost cutting and consumers are more reluctant to part with their money.

I think it'll depend highly on who's at the right place at the right time... that is of course if you can't be at every place at every time. (i.e. Coca-Cola) The only businesses I see booming right now is in the technology area... and that's more on the hardware rather than the internet or software. It probably has something to do with the idea of expanding further into the digital era or something. Just my thoughts though... :|

[bagyoboy]

A rag tag entrepreneur might start out with pure guts armed with product knowledge and little market intelligence. And although he might have market intelligence, he might not have the "numbers" - the ratios in the statement of financial condition. its like driving a car without any fuel guage or oil guage or speedometer and tacometer. Just gut feel. For a rag tag 78 model car to evolve to a 2001 Ford Expedition, such guages and indicators are required for intelligent business decisions and forecasting.

[bobnoxsius]

Too many people are investing millions on things that just won't work.

So sell these " things " and get rich quick!!

[zimdude]

any more tips from the pros on starting businesses?
or if you're employed, how can you tell if your employer is having trouble?

[cong]

lack of management.

the six reasons for low PROFIT in business are as follows:

-failure to plan
-failure to monitor your financial position
-failure to understand the relationship between prize, volume, and costs
-failure to manage cash flow
-failure to borrow properly
-failure to manage growth

there may be more, but thats all i can think of right now.

[cong]

Originally posted by zimdude
any more tips from the pros on starting businesses?

everything starts from you, the entrepreneur. it would help to have the following mind-set:

"success is a function of suberb execution of the basic fundamentals.". thats from a mentor.

"we dont make money for activity, we get paid for results.". thats from my dad.

"a vision of what the future holds is what separates leaders from followers." also from my dad.

"capture the thought that youre the best at whatever it is that you do than anybody else is at whatever they do. thats what defines a great person. never settle for good, go for greatness.". ME, i just made it up right now. ;)

remember this dude, the success of your business springs from the willingness of you and your partners/employees to embrace ACCOUNTABILITY. that word, along with PROFIT, are my two favorite words in business. regardless of your abilities, you will struggle unless accountable people implement and sustain your structures, systems and strategies.

start with a mission statement, an objective. DONT JUST SET GOALS, set the steps to reach that goal. (this ones pretty basic.)
have a vision, enumerate the steps to get there. have a business plan or a plan for success. DEFINING YOUR VISION IS WHAT I CALL A BUSINESS PLAN. again, at the risk of sounding redundant, enumerate your steps, where you will be at this time next year, and how you will get there.

theres a lot more, im just tired typing.

or if you're employed, how can you tell if your employer is having trouble?

downsizing, cutting costs is usually a tale-tell sign. dont you have monthly s.o.p. meetings? its a meeting wherein you discuss the state of the company.

[cong]

Originally posted by nix
Aticus' reasons are for highly capitalized start-ups. ;)

For mom and pop stores and mid-sized businesses, I think that the biggest reason really is a lack of market planning. Everyone takes a good idea in its simplest form, and they never expound on it from that point onwards. Also, people tend to rationalize the business case of any idea or opportunity. Risks are always placed in the backburner because of the initial excitement. :p

i agree. its one thing to get all psyched up because of what you percieve is a profitable venture, but mistakes are made when sound business planning gets shoved out of the way because of too much excitement.

i know of one person who had a seemingly brilliant and profitable idea only to fall flat on his face a year after. the "sex and sizzle" superceeded logic. in the middle of it all, i asked him, "how do you know when you get there if you dont even know where youre going?".

ayun, bangkarote tuloy.

[Cookies4Kids]

In my opinion, a lack of TRUE VISION... and the work ethic to sustain that vision until its completion.

According to Henry Sy, those are the two things that are the secrets to his success... Dream BIG, and work hard towards that Dream.

Those also are the secrets to success of a lot of successful companies that started out from scratch (check out Walt Disney, KFC, McDonalds, Coca-Cola to name a few)... financial intelligence will only get you so far... it is your resolve to achieve your Dreams that will bring you success.

Just my take on success of course after reading numerous books on various success figures around teh world:)

Peace!:)

[aisrael]

Originally posted by Mokkori
I'm no economist but I think that a factor can be attributed to the notion that a business cannot gain without another losing... I think that most markets are finite and when there are more businesses than consumers, businesses are bound to fail. I was just about to say the same thing. "The best-laid plans of mice and men, oft go astray. - Robert Burns"

It's an unstated economic principle, I think, that most 'profit' is realized from attrition.

There is usually very little actual 'value' that is created when actually manufacturing products or providing services. If all your profit is derived from the 'value added' to your raw materials or labor, you'd probably realize very little capital gain.

Most profit is derived from 'rent-seeking' (in simple terms, being able to capitalize upon or dictate artificially high prices), or 'attrition' (profiting from the shortcomings of other individuals / businesses -- mergers & acquisitions).

You have to remember that, just like in tong-its, one person has to lose money for another person to make money. Unless you add to the money supply -- but to do that, you'd first have to add 'value' in terms of resources & labor -- otherwise, you're just devaluing your money and creating inflation.

I guess, it's similar to how 1% of people are really rich, another 10%-20% or so middle class and the rest, lower class or even marginalized. Except we don't let people 'die off' when they cease to be productive.

Businesses, when they cease to be profitable, are simply shut down (or sold).

My Php 0.02

[zimdude]

So does aisrael mean that business is a zero-sum game - that is, to gain somewhere you must lose somewhere else?

When someone says that they are "adding value," does that mean that value is subtracted somewhere else?

Innovating companies take away business from stagnating ones?