3 Reasons Why Businesses Fail — and How to Start a Business

Jay Goltz, in an article in The New York Times, lists down the major reasons for business failure.  He says that entrepreneurship is not for everyone.  One has to have the drive, tenacity, perseverance and personality to be a successful entrepreneur.  He also lists down tips in starting a business.  If you are thinking of starting a small business, read on.

People start businesses for all kinds of reasons. Some expect to get rich, some want to be their own boss, some want to follow their passion and some want to control their own destiny (or at least try). Many have one thing in common; they fail. More than half, depending on whose number you use and how much time you give it.

When I started my business in 1978, there was very little information out there on how to start, expand and operate a small business.

The world has changed. Today, there are countless magazines, Web sites, classes, organizations and consultants available to help the aspiring entrepreneur. Given all of these resources, the question arises: Why is the failure rate still so high? I believe there are three reasons.

First, many entrepreneurs learn to build a business the way some people learn to swim; they just jump in. They might have the basic skill, or even be very talented at the task at hand, whether it is baking or programming or candlestick making. What they lack is basic knowledge of marketing, management and accounting. Even though there are many resources available, they are too busy doing the task to learn how to do the basics. In this case, ignorance is not bliss; it is a ticking time bomb.

Bad management, bad accounting and ineffective marketing will suck the life out of a fledgling business if it is not corrected.

Second, not everyone is wired to be an entrepreneur — just as not everyone is wired to be a social worker, a lawyer, a salesman or an accountant. The success or failure of a business has less to do with the idea and more to do with personality, drive, skill set and tenacity. Businesses don’t fail, people do. In fact, the lessons learned may very well be the springboard to future success. There are many entrepreneurs who have had fabulous success after fabulous failure.

Third, entrepreneurship is about risk. Sometimes it is calculated risk; sometimes it is a shot in the dark; sometimes it is delusional. Even the most experienced entrepreneurs cannot always predict what will work and what won’t.

So, what is the solution? There are things you can do to increase your odds of success. Learn enough about accounting to not be dangerous. You don’t have to become a C.P.A., but you should understand the income statement, the balance sheet, the difference between cash flow and profits, the basics of borrowing money and how to operate an accounting program.

Do a business plan so you can see how all of the working parts go together. Go to trade shows and talk to people in similar businesses in other cities where they might be more likely to give honest feedback.

Naivety in business will prove expensive. You will make mistakes, but make sure you can undo them. If you go into business with someone, make sure it is a strategic alliance, with a clear understanding of what skills each person brings to the party. Make sure your goals are aligned. Even so, it is still probably a mistake — not because you are friends but because it is unlikely that you will stay on the same page when the problems start, which they will. Have an agreement in place that will govern the process if you decide that you want to split up.

One more thing: Going into business is risky, treacherous and demanding. But it is also invigorating, rewarding and beautiful, when it works. It is a lot like nature — with violent hurricanes and beautiful sunsets. I am not sure that you choose to be an entrepreneur; it chooses you.

Photo by lydiacarsonlaw

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