Business failure is when a company goes out of existence due to the inability to make profits that are enough to cover the expenses. When one is starting a business, they should understand that entrepreneurship is about risk and reward.

This is why it is important to come up with a good business idea, create a unique product or service, test the product, interact with potential customers, ensure resources are in place and build a solid team. Below are five reasons why business fail.

1 – Lack of Planning

Planning is an essential management tool for business existence. A business plan should be a clear roadmap of where the business has been, where it is and where it is going next. Planning starts with reviewing the current operations and identifying the areas of improvement. The next step is to envision the business goals, determining the steps required to reach the projected success.

Planning ensures that there is an efficient use of resources, effective management of risks and uncertainty, promotes team building and to support a strategic exit. Failure of a business to plan effectively will result in business failure.

2 – Poor Management and Leadership

Management of a business involves planning, organizing, controlling, directing and communicating. Good leadership and management are critical elements for a successful business, and they include the ability to communicate effectively. Strong leaders with excellent management skills and impact the company positively.

Poor leadership, on the other hand, causes repercussions in the business by causing misunderstandings, low morality and culture mediocrity, lack of integrity, employee dissatisfaction and poor performance. Poor leadership and lack of effective management skills will reduce workers’ productivity hence causing business failure.

3- Inadequate Financing

Cash flow is the backbone of a business, without it, a business cannot continue. Lack of working capital and other financial options contributes to lack of investors thus lack of success. A business can lack enough working capital due to a low credit score and the inability to borrow from financing sources such as banks. Lack of enough capital will result in unsustainable cash flow situation which will affect the business operations. Increased current liabilities over long periods will cause business failure.

4- Insufficient Knowledge of the Market

A business needs to be able to adapt according to the change in the needs of the target group. Therefore market research is vital to the life of a business.  Good research on the market helps the entrepreneur to understand the market and ensure the pricing is both competitive and gives a good return. Proper market research assist one to prevent over optimistic forecasts. Lack of a good market research will result in selling to the wrong group, hence low returns.

5 – Poor Customer Service

Customers always want to be treated with respect.  Some of the poor customer service includes poor attention to detail, unprofessional interactions and long waiting and response times. Poor customer service will lower customer satisfaction. A company with poor customer service will have a bad reputation, poor consumer retention, and loss of best employees. This will cause fewer sales and a downward spiral of profits.

Top 5 Reasons Why Businesses Fail