Why Companies Fail

We, as a society, pay an awful lot of attention to why personal relationships fail. We read books and magazine articles. We watch infomercials. We go on retreats. We seek professional help (either secular or spiritual). We even write songs and make movies about break-ups. For all the energy we put into figuring out why people—whether friends, relatives, or romantic partners—go their separate ways, nobody has come up with a magic formula that guarantees relationship success.

Not much attention is paid to why businesses fail, when in fact the prognosis of a business is far more controllable than that of a personal relationship.

The reality is that over 25 percent of all start-ups tank within the first year, and 70 percent fail within 10 years.1 There is something to be said for optimism, but refusing to look these statistics in the eye, so to speak, is essentially the same as burying one’s head in the sand. The positive-thinking industry has led people to believe that confidence or “vibrations” are the only requirement for success, when in fact it is more effective to be aware of possible roadblocks and figure out ways to avoid them. So let us take a look at some of those things that might cause a business to fail.

Incompetence

Statistic Brain reports that incompetence accounts for a whopping 46 percent of all business failures. This is incredible, because most entrepreneurs are intelligent and savvy by nature—certainly not nitwits. So how is it that almost half of businesses fail for this reason? These very bright and creative owners may see a grand vision but not know how to handle the small details of their operations. Lack of planning and poor recordkeeping were two specific pitfalls cited in this report. Ignorance in financing and taxes was another issue. Bad pricing strategy also contributed to failures.2

Inexperience

According to Statistic Brain, lack of experience was responsible for about 41 percent of business failures. This inexperience was either related to management or to the specific product or service that was being offered. Poor management choices involved uncontrolled, rapid expansion and bad practices regarding the use and granting of credit. Management errors related to the line of goods included inadequate inventory, inefficient marketing, and lack of knowledge of vendors.3

Considering that 87 percent of businesses go under due to incompetence or inexperience (or a combination of the two), it might seem that most of these failures might have been preventable. In fact, they likely were. Just as many couples seek premarital counseling, a new business should make a point of budgeting for a consultant as early as possible. By getting a consultant on board, a business owner can map out a plan for success and have someone to call on when things seem amiss.

Ignoring the fact that things can go wrong is by no means a useful strategy for ensuring that they do not go wrong. Things will happen whether you address them or not. It is better to know what hurdles stand in your path so that you can jump over them with grace.