20 Common Causes of Business Failure


By: Site Engineer, Staff

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To run a business is no easy task. Business fails for many reasons which we are going to explain below.

The causes of business failure include:

1. Poor Feasibility Report

A feasibility report is the company’s terms of reference. It shows at a glance the economic justification of the business activities and resources necessary to actualize them. A poorly drafted feasibility report would certainly lead to business failure as the investor would not only be misled but also be given false hopes, expectation and a wrong sense of security.

2. Lack of Adequate Planning

Planning has to do with forecasting future circumstances and requirements, deciding objectives, setting long and short-term goals, determining measures and steps to be followed. Since every investment decision has risk component, adequate attention must be given to the planning process as to ensure an articulate identification, appraisal, implementation, and monitoring of activities, aimed at minimizing the chances of failure and success respectively.

When planning is not properly handled, such a business would not stand the test of time. The mistake most entrepreneurs make is to engage the services of ubiquitous quacks, for cheap fees, to handle their planning function.

3. Incompetent Management

Not having competent, experienced and efficient management team is one of the most devastating setbacks any business establishment could suffer, since the success or failure of any enterprise rests squarely on the management.

4. Inarticulate Programme of Action

Work planning and the determination of the company’s objectives become effective early when they are expressed in policy form. Looked upon this way, policy formulation is an essential ingredient in the successful administration of a business. A policy is a guide to action and provides a continuous framework for the conduct of individuals involved.

Sound and consistent policies are required if good results are to be expected and poor policies would lead to poor results and the eventual collapse of the enterprises.

5. Under-Capitalization

This has become one of the greatest causes of misery to African business owners. While a lot of people with very brilliant business ideas cannot get started due to lack of funds, those who take the bold step forward to commence their dream business with the little resources at their disposal, sooner or later, discover that after a while, the business becomes distressed due largely to liquidity crises.

6. Poor Market Analysis

This has to do with the business owner’s assessment of the nature and level of demand for the product or service offered by the enterprises. Inaccurate market projections would result in the misuse of scarce resources with the resultant negative consequences on the fortune of the business.

An accurate market analysis would enable the organization to determine within an acceptable margin of error, the present and future market requirements. But when the market analysis is fair, the organization would not be in a better position to design its product/service in accordance with customers’ preference, at economically efficient qualities, packed suitably and making appropriate arrangements for effective promotion and distribution, otherwise, the product would not be accepted in the marketplace. As this happens, the business would fail.

7. Lack of Opportunities for Staff Growth

The staff component of any organization is a crucial factor for success. There is no denying the fact that any company wishing to succeed must inevitably carry its staff along with its growth path. Personnel, unlike other resources, have feelings and aspirations; aspirations that they look into and hope that their companies would assist in realizing.

These include, among other things, career fulfillment and financial stability. Any company that does not see to its staff’s financial and career well-being, would be a training ground of staff for other companies. When a company continuously loses its best hands, it would in the same fashion crash out of existence.

8. Filing Behind the Crowd

This happens when a business is set up to do just what is competitors are doing and in the same styles. This does not give the organization its own identity in the marketplace. No client would make any conscious effort to trek to a meter away from the nearest competitor, as there would be nothing special to justify the effort.

There may be no new line of business to venture into, but business success calls for creative innovations to existing business ideas or product/service delivery system, otherwise, innovative competitors would in no time knockoff business.

9. Neglecting Business Ethics

The safest to ensure that your business fails is to neglect the rudiments of acceptable business ethics. The demise of the African banking sub-sector, where directors and top management staff have to convert depositors’ fund into personal use and maintain different accounting books for different inspectorate bodies find an explanation within the context of abusing the ethics of the profession. Once ethics are thrown into the dustbin, be assured that business would sooner or later fail.

10. Neglecting its Social Responsibilities

Business succeeds only when numbers of the community in which it finds itself efficiently patronize it. A business enterprise, therefore, does not exist in isolation from the society in which it has its being. A business outfit must recognize its immediate society, and where there is any special interest, the business must offer it to the wider community. Subsequently, products or services must be beneficial to the community, reduce as much as possible, any harmful effect of its activities in the operating environment, by avoiding the negligent discharge of pollutants, and of course, avoiding unnecessary waste of the earth resources.

Any company that neglects this would be at dagger drawn with the law and the community in which it operates and the ensuring conflict may degenerate into a situation where it would be difficult to achieve a business objective, which inevitably would lead to business failure.

11. Poor Communication

Communication is the means whereby individuals in organization exchange information necessary for the smooth operations of the enterprise. It involves the exchange of ideas, facts, and emotions by two or more persons within and outside the organization, through the use of words, letters and symbols.

Effective communication is a key element in the success of any structure organization as it provides a link between various departments. When there is no free flow of information, production or service delivery system would be dislocated, as a policy decision, and objectives cannot be communicated to those concerned, and the ensuring disenchantment could spell doom for the organization.

12. Wrong Location

What has location got to do with the success or failure of a venture? You may ask, but removing that location determines a lot of things. If your business involves manufacturing, that requires the processing of bulky raw materials, it is only economical to locate your factory near the source of raw materials; otherwise, a chunk of your working capital would be spent on transportation. A number of businesses have failed because they were cited at wrong places.

13. I Have Arrived Syndrome

Many entrepreneurs run out of control as soon as they venture into business for themselves. As this happens, they talk and act bigger than they should. Subsequently, through their unguarded utterances assume more financial responsibilities than their pockets could sustain and ingloriously dig into their business capital, and before they realize it, a deadly blow had been dealt with their business funds.

14. No Reward for Hard Work

Many business owners in Africa are yet to see the need for rewarding staff, which put in more than they are being paid for. They would rather treat all their staff in the same way, unmindful of the grave consequences this have on staff morale. When there is no “thank you for a job well done,” the few hardworking members in your team may not find justification to continue working hard, and this may affect the fortune of the business and subsequently lead to failure.

15. Extraneous Factors

These are factors purely outside the control of the business owner or that of his managers. It could be natural misfortune, economic or political crises as we do experience in the world today.

16. Protracted Ill-health or Death

Many entrepreneurs are the “all and all” of their different businesses. Some hold their business secrets very tight and confidential that in an event of long ill-health or death, there will be nobody who will continue the business because the entrepreneur has died with the secrets of the business. The business will also die with the owner.

17. Crises of Succession

Usually, many business owners always fail to plan especially in the future. Some will have two wives or more with many children. These children all have a stake in their father’s property and when the entrepreneur fails to make adequate succession plans for the business, it is most likely that the children will misunderstand themselves which may lead to struggles and court actions that may eventually cripple the business.

18. Bad Spending Habit

Many entrepreneurs fail to understand the difference between their self and business; hence could not separate self from the business. This leads to the spending of the company’s money, as he deems fit because he believes he is the owner. In most cases, this helps to kill the business.

19. Lack of Connection

This particular issue has a very strong root in Africa, which we are using as a case study. Good connections can help business to grow, and lack of it can help in strangulating business especially in Africa where the “African factors” of who do you know, or where do you come from, play a big role in what you get or lose.

20. Unfavorable Government Policies

The survival of most business, especially small business, depends mainly on good government policies; but if there is any bad change in the policies, it will affect some businesses.


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