Recent studies show about one-fifth of startups fail in the first year, and almost half fail within five years. The survival rate for ten years or more is only one-third. Entrepreneurship comes with many risks, and one is never sure whether the business will survive the rough storms of business ownership. Therefore, people who are not comfortable with entrepreneurship’s uncertain nature prefer working as employees all their lives. But why is entrepreneurship risky when it comes to starting and running businesses? Here are three reasons entrepreneurs fail in business and how to avoid them.
Inadequate Management of Resources
Often small businesses overspend their resources in the first few years because they want to give the venture all they have to make it successful. However, successful businesses do not require an abundance of resources but better management of resources. Spending a lot of money in the first year means that the business is left with little or no money for the future. Also, small businesses are unable to manage their human resources effectively. The success of a business depends on the strengths of its team. Small businesses and entrepreneurs avoid hiring the required professionals. They try the allocation of several tasks to one person, which causes trouble for the company. Employees wish to work for multinational organizations, and finding a skilled workforce becomes a challenge for the businesses. The lack of management of resources by the company leads to the failure of the business.
Lack of Marketing Efforts
Marketing and advertising are important endeavors for all businesses, large or small. Choosing the right strategies for marketing, sales, and advertising is critical to the company’s success. Entrepreneurs often invest little effort in marketing their business, which fails to attract the target audience; therefore, the business fails. Recent studies on business failure show the small businesses avoid vigorous marketing because they cannot compete with market giants. However, they fail to understand that marketing does not mean making sales more than competitors. Marketing is the process of knowing the target market, analyzing their needs, developing efficient products for the target market, making potential customers aware of the product, and making sales. If any step in the process is not performed properly, the business is likely to fail.
Over-Expanding the Business
A few sales at the start of the business does not indicate expansion. Over-expansion occurs in two ways. Firstly, when businesses receive a few orders and make sales during the first few weeks, they start taking more orders which they cannot fulfill due to the limited resources and experience. This affects the quality of products and services provided to the customers and decreases the repurchase chances by the customers served in these chaotic periods. Customers are always looking for personalized experiences with the company, which is impossible if the company is trying to serve more customers than it can handle. Secondly, the companies start investing in the business, based on the few sales made. More inventory is added, new machines and equipment are purchased, more staff is hired, and a vigorous expansion is witnessed.
On the contrary sustainable businesses demand calculated expenditures. Also, a few sales do not determine the demand and potential of the business. Small businesses must be reluctant to undergo major expansions until they have successfully implemented their initial business plans.
Unlike multinational organizations with abundant resources and the ability to take risks, small businesses cannot endure high risks. In case of a failure, the stakeholders will face huge losses. Entrepreneurs need to understand that running a successful business demands maturity, patience, and the ability to make an efficient, smart, and calculated decision. It demands control of the impulsive attitude of young and inexperienced entrepreneurs. However, a balance between avoiding risks to avoid undue expenses and taking risks to enhance profitability is the key to a successful business.