Why do some businesses fail?
Just having a good idea and motivation is no guarantee of success. Here are a few common reasons why businesses can fail:
- Lack of financial management skills: It is important to keep personal money and business money separate. Business money needs to be managed separately so that you know whether the business is making a profit and running successfully. From this profit you can allocate money for yourself to spend on household expenses, eg food and school fees.
- Insufficient funds: Some entrepreneurs may underestimate how much money they need to start their business, especially as many businesses can take a year or two to get going. Some people may have an unrealistic expectation of the profit they will receive, particularly when starting out, and are therefore forced to stop the business before they have had a chance to succeed. It is therefore important to make a realistic assessment of how much money or capital your business will require, where you can get this from and at what cost. This will be part of your business plan.
- Not understanding the market: It can be tempting just to start the business you have always wanted to do, or to copy what everyone else is doing, without understanding the market and whether it will actually succeed. This is a mistake that can cause failure right from the beginning. To succeed, you need to identify an unmet need or gap within the market that you can satisfy with a product or service from your business.
- Failure to adapt or innovate: Although your business may be successful at first, it is important to stay continually aware of what the market conditions are, whether any circumstances have changed and whether the business needs to adapt or evolve with the new conditions.
- Location: Sometimes it is not just about having the right idea – it is having the right idea in the right place. A bad location can mean disaster to even the best-managed business. Some factors to consider when deciding on location include where your potential customers are, how accessible your location is, where your competitors are located and what sort of space you can rent for your business to operate from.
- Expanding too quickly: Many businesses fail when they try to grow or expand too quickly. If you want to grow your business, it is important to have a plan to manage this process. Make sure the business can keep up with the demand from the growing number of customers. It is also likely that you might not be able to do everything yourself as the business grows, and therefore you will need to think about hiring and training staff to support the business.
- Lack of support or mentoring: Many new entrepreneurs would benefit from mentoring or ongoing support from existing business people or project staff with skills in this area.
Knowing and being able to reduce some of these potential challenges will make your business more likely to succeed – but of course, there is no guarantee! However, if you do fail, it can be a great opportunity to learn from your mistakes and to use these lessons to succeed next time. Studies of successful business owners have shown they attributed much of their success to building on earlier failures. Before his eventual success, Thomas Edison, who invented the lightbulb, said, ‘I have not failed. I’ve just found 10,000 ways that won’t work.’
Claire Hancock is Tearfund’s Global Livelihoods Lead.
Question: 'How can I find the money to set up or expand my business?'
Answer: The first source of finance you should consider for your business is your own savings, or money you can raise by selling any spare items. The second source you should consider is your family and friends, and their savings. This is because the interest rates on small loans can be very high, and you could find this a considerable burden on your business through the first few months. Borrowing from family and friends can save you a significant amount of money.
Another alternative is savings and loans schemes. These are local groups of about 15–20 people, who each bring their savings together regularly. The group makes loans to its members, and the interest is kept by the group to increase the amount available to lend to other members. The schemes elect their own officers, make their own byelaws and set their own loan terms.
Banks are a difficult option because they are usually not geared up to deal with the small loans that you are likely to be considering. Microfinance organisations are the main alternative to family funding or savings and loan schemes. These organisations are set up to offer small loans and other financial services to people with low incomes. However, do check the interest rates and repayment terms to make sure they are reasonable. Visit www.microfinancegateway.org for information on microfinance organisations in your region.
Whichever source of funding you choose, your business plan will help you plan your income and how and when to make loan repayments.
Answer adapted from Setting up a biblically based business by Michael Clargo.