The Top Five Reasons Why New Businesses Fail

The Top Five Reasons Why New Businesses Fail

With dizzying valuations and emergence of hot sectors, the startup company life may seem glamorous at first. But running a business requires a combination of passion, planning and funding, which is no easy feat.  

Entrepreneurs must possess the business acumen of bringing a product or service at a price point that meets the demands of the consumers, while being flexible in mitigating any company-specific risks simultaneously. Otherwise they will face failures in the first few years in Singapore. 

But businesses do fail as well. Failure statistics have shown that an average of 3,700 companies closed down every year from 2014 to 2019. For 2020, 3,800 companies were registered as closed last year in the same period, as the Covid-19 pandemic added more strain to businesses. 

For budding Singapore business owners out there, it is therefore necessary to understand what can lead to business failure and how each obstacle can be managed or avoided altogether. Today, I list the top five reasons that can cause startups to fail. 

  1. Starting a Business with Too Much Debt

For many aspiring business owners, getting a business loan in Singapore is a reasonable choice to help finance a new venture, if their cash-on-hand is sufficient to service any out-of-pocket expenses. While it is necessary for a business to go into debt to finance the launch of business, too much of a debt may pose risks for a company at its infancy.  

That is why it is important for businesses to exercise prudence when borrowing and spending monies, such as ensuring a low debt-to-equity ratio, while keeping overheads and expenditures low. In addition, businesses should also prioritise repaying debt and making timely payments as their priority. Otherwise, it is hard for businesses to grow and scale. 

  1. Inadequate Budgeting and Financial Planning

Besides having too much debt when starting a business, many startups have also cited business failure due to cash flow issues. 

For instance, while business owners may be intimately aware of the expenses for the day-to-day operations, such as rent, utilities and salaries, they may lack oversight in keeping close tab on their budgets. A comprehensive budgeting is essential as it helps business owners keeping track of its financial goals. Otherwise, they may face serious risks, such as underestimating their earnings, which will put them in a vulnerable position of failure. 

In addition, businesses should adopt a clear accounting system by keeping a good record of business expenditures and income. This is useful in helping keeping tabs on budget, as well as cash flow through close monitoring of accounts payable and receivable. The viability and productivity of a business can be severely impacted if bills are not paid and customer accounts are not collected timely, which can cause the business to rack up financial deficits on the long term. 

 3. Failure to Understand Consumer Demands

The second reason why businesses fail to scale up is due to the inability to connect with the demographic.  

As mentioned earlier, running a business is about answering to the demands of customers. Business owners should ask themselves the following: What do customers want? What do they need? How the service or product can resolve their problems? If a business is unable to connect the dots and understand the needs of its prospective customers, there is no business in selling the products or services until it really understands them.  

There are a myriad of ways to overcome this problem, such as through focus groups, market surveys, as well as interviews via emails or phone calls. So as to understand and connect with the target audience better. 

  1. Poor Business Planning

Besides failing to understand consumer needs, businesses often fail due to the lack of effective business planning prior to commencement of operations. Business owners who fail to devise a well-thought-out plan before beginning operations will bound to set themselves up for challenges. Similarly, a business that does not conduct a periodic review of their business plan in anticipation of changes in the market or industry will set themselves up for difficulties through the course of its operation. 

To avoid such pitfalls, entrepreneurs should have a solid understanding of the business or industry they are entering. They should also devise a good business plan which addresses the following: description of the business, identifying opportunities and threats within the broader market, capital and manpower needs, marketing initiatives and competitor analysis.  

  1. Ineffective Leadership

Leaders are not born; they are made through experience. The adage holds well, especially in today’s environment where it is no longer “business-as-usual”. It is important for entrepreneurs to lead with strategy and rapport, while being flexible in their approach. However, many leaders often fail to listen to the ground and paying attention to the little things, such as constructive criticism to employee needs. 

That is why is it essential for a business to be headed by a leader who is able to show effective leadership, and not to end up micromanaging their employees which can result in low morale and productivity. It starts with leaders being bold, yet firmly grounded by building relationship and trust with their employees, while remaining agile by responding to changes and working closely with employees to achieve positive results. In addition, entrepreneurs also need to be unrelenting mentors and help to play a part in the development of their employees. These little things do add up to effective leadership.  

While business failure is something that is unavoidable, it does not necessary mean a business has to fail. Through research, thorough planning and prudent spending and budgeting, entrepreneurs can avoid the many pitfalls of a new business and find sources in success. However, if want to start a business, especially if you are going to involve a few partners, is it important to reach a consensus with each other and making sure everyone is aligned.  

A case to boot: I know of a friend who wanted to invest in a setup dealing in digital services. However, his gut feeling is telling him that the partnership will only last for at most 3 years, due to the differences in managing a business; one wanted to obtain a higher loan, while the other did not do much market research to understand their unique value proposition. In the end, the friend decided to exit the partnership, although he was given the chance to buy their shares and could afford to. 

So remember, always do your homework and avoid pitfalls if you want your business to succeed. 

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