I am often asked why businesses fail. Although there can be specifics, most businesses seem to fail for the same reasons:
- Misunderstanding the need. Many new business people think if they want a good or service, everyone wants that good or service. Not necessarily. There are many great books on prototyping or a process called failing fast that let you test the marketplace. i.e. don’t sign a five year lease because you have a neat idea.
- Too many fixed expenses for the sales you create. Or to boil it down, rent and capital costs kill.
- Spending the Gross. This is such an easy trap to fall in. The most obvious example is throwing the sales tax collected into your business bank account and leaving it there. The temptation to view it as revenue is overwhelming. Get it into a separate tax account! The second part of this ditch is confusing revenue with income. Income comes from what is left after replacement costs, depreciation, government and industry fees etc. I have met too many $100,000 income earners who had to go bankrupt because they ignored this simple rule.
- Not putting anything side to make needed capital or operational changes. Businesses are changing daily, don’t be the last to know.