14 Common Reasons For Entrepreneurial Failure

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By: Site Engineer, Staff

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There are many reasons why business fail. It is realized, however, that the basic list of factors of business failure is the same from industry to industry.

The most common reasons for failure are:

1. Lack of Experience in the Line

Anybody who enters business in a line where he knows very little or nothing about may be in for trouble. An individual needs to know the nitty-gritty of the area of business he wants to undertake.

Even if he is not versed in the specific business line, he should be versed in a related line. If not, the individual will be at a loss on how to conduct operations. He will not know much about operational methods, procedures and policies and hence cannot compete favorably with entrepreneurs in the same business line.

2. Incompetence

Here the entrepreneur does not know how to run the enterprise. He takes decisions that are full of mistakes which experienced, and well-trained entrepreneur would easily see and correct. He does not understand the act of decision making.

3. Natural and Artificial Disaster

Sometimes, disaster can be a failure factor. This refers to some artificial or natural unforeseen happening. It could be fire, burglary, hurricane, earthquake, etc. These natural disasters can destroy the properties of the business forcing it to declare bankruptcy. Normally, natural disasters are beyond the control of the entrepreneur.

4. Poor Location

Sometimes poor location can be a failure factor. Some businesses are located in places with a poor economic base. The people’s purchasing power is not much and this eventually reflects negatively on sales.

5. Poor Health of Entrepreneur

In addition, poor health of the entrepreneur is a contributory factor to business failure. A small-scale business usually suffers this factor seriously, the moment the business owner is not active physically it tends to affect his business. He may not have enough time for his business due to his sickness.

6. General Economic Conditions

It is necessary to note that the general economic conditions of a country in which the business is operating may assist to determine business success. If economic conditions are good, even poorly organized businesses may be successful.

On the other hand, if economic conditions are poor, only a small number of businesses may be able to maintain their success.

7. Lack of Adequate Planning

Lack of adequate preparation and planning, especially strategic planning, renders most of the business effort useless.

8. Lack of Managerial Experience

Here the entrepreneur does not know the tricks in running a business. He does not know what to do when certain things go wrong. In short, he lacks the managerial know-how. As a result, he does not know how to effectively and efficiently manage resources, that is, men money, materials, and machinery. Getting management training would go a long way in assisting the entrepreneur in this respect.

9. Lack of Connection

Though lack of connection may not be applicable universally, it has become a very important factor in some developing countries situation. Generally known as the ‘god-fathers’, we realize in developing countries that jobs are given to people not because of what they can do but because of who they know. Competent individuals without ‘god-fathers’ end up without jobs. To succeed in business in developing countries, therefore, if you have no godfathers, then you need an ‘overdose’ of the characteristics of entrepreneurs. This connection syndrome is very common especially in contracting and distribution business among others.

10. Neglect

When an entrepreneur does not give adequate supervision to his business, it is bound to fail due to neglect. Every endeavor in life needs sufficient attention to succeed. An entrepreneur who has his business situated in one big city in the country but stays in another city far from where his business is actually situated may end up with a collapsed business.

Also, those who even have people working for them in the same town but go on pursuing other things with little time to find out how things are going will also fail. An owner staying away constantly from his business will have his business operations gradually deteriorating.

11. Fraud

Fraud involves deception. It is a situation when one or more of the employees take money or goods (raw materials or finished goods) from the business for his own account. Where fraud is frequent or substantial, the business may find itself becoming bankrupt and eventually, it will collapse. To curtail this, the entrepreneur has to check the books and take stock regularly.

12. Unbalance Experience

Here, the entrepreneur does not have well-rounded experience in the major areas of the business such as finance, production, and marketing. Despite his lack of well-rounded experience, he also refuses to employ personnel that could help in the areas he is deficient.

13. Lack of Management Ability

Most of the causes of business failure discussed above could have been prevented if the entrepreneur were a capable manager. Because of the poor management ability of some entrepreneurs they are unable to solve some management problems. These management problems and traps can be grouped into three major areas.

They are:

As regards financial planning, businesses fail because the owners do not keep records of what they do or such records are inadequate. Revenue and expense records are not properly kept. So eventually, they will not know where the position of the business is in terms of its finances. They will not know whether they are gaining or losing.

In some other cases the entrepreneur, even where records are kept, does not understand the basic principles of bookkeeping and accounting. Even where a qualified accountant prepares the books, the entrepreneur may not be able to interpret the accounting figures so it is not possible for him to correct lapses even where they can be easily seen from the books. In other cases, the entrepreneur does not control his credit policies.

This allows a very high degree of debts. Eventually, it reflects a high percentage of bad debts which affects the cash flow of the company. In addition, some entrepreneurs do not separate business and personal money. In such cases, they are unable to know when the business is doing fine or not.

The second major management trap the entrepreneur falls into is poor coordination between manufacturing and selling. Here the entrepreneur does not develop new products. He sometimes remains in the market with outdated and obsolete products. They are therefore not competitive.

Closely related to this is the lack of product diversification. He does not care about product research. Also, some business fails because they do not indulge in market research. They are therefore not conversant with what the customers need. In that case, they are not market-oriented.

The third major management trap is poor general administration. The entrepreneur is unable to carry out supervisory and control functions, he refuses to delegate responsibilities. He is also unable to communicate effectively the company policies to employees and also fails to pay adequate attention to administrative problems. In fact, such entrepreneurs are bad leaders. These result in poor overall coordination and inefficiencies of operations.

14. Inadequate Capital

Sometimes, the entrepreneur does not start his business with enough start-up capital. Providing money for fixed assets or rent is not the all-in-all in business. The entrepreneur must make sure that he has enough money for working capital, wages, and initial production costs. Where he does not have the money personally, he should seek the assistance of relatives or financial institutions. Where this is not the situation, the business will fail immediately it is established due to a shortage of capital.

 

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