So Many Good Businesses Fail By Neglecting These 5 Key Elements of Entrepreneurship Paying attention to cash flow, competition and leadership quality are just a few things that can save your company in trying times.
By Larry Alton Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
Good ideas are hard to come by. When you hear the popular -- but somewhat questionable -- statistic that eight out of 10 businesses fail before the end of their second year, you have to wonder why.
The easy leap is to assume that eight out of 10 businesses aren't good businesses -- they aren't founded on good ideas, they don't have a solid infrastructure or they don't pay attention to customer service. But this statistic seems unlikely were that the case, and we've all had personal experiences of a beloved business closing up shop, whether that's the coffee shop next door or your favorite nationwide retailer.
Related: 5 Things Not to Do Running a Small Business
Obviously, what constitutes a good business to a consumer may not constitute a good business to an accountant or an angel investor, but let's define a good business as ambiguously as possible with some universally agreeable truths about good businesses
- They're founded on sensible ideas that fill or solve a real consumer need.
- They have a basic, functional infrastructure that allows them to produce.
- They care about their customers and prioritize quality of service.
- They have a reasonable profitability model and a sustainable stream of revenue.
Theoretically, a business with the above qualities should grow and thrive -- so why would businesses like this fail? Unfortunately, these qualities just aren't enough. There are ways that even well-founded, well-structured businesses can go under.
1. Cash flow
Cash flow ruins businesses. As the measure of the amount of freely expendable capital in a business, when cash flow becomes negative, the business tends to go bankrupt. Here's the problem: A profitable company, on paper, can still have trouble maintaining a positive cash flow.
For example, if you have high overhead costs and salaries but you have trouble getting your customers to pay their invoices on time, you might have a profitable model that isn't realized with real currency. Prioritize your measurement and ongoing analysis of cash flow, regardless of your other financial standings -- it can ruin you if you neglect it.
2. No evolution
Businesses don't exist in a vacuum. They exist in a world where new technology emerges annually, consumer trends change constantly and the world demands everyone else to try and keep up. A good business in 2010 would have a hard time managing the same processes and staying profitable today.
No matter how good or sustainable your idea is, you're going to have to undergo some major changes if you want to stick around for the long term. It might be a new product, a new benefit for your customers, a new technology or a simple pricing change -- but something needs to change if you want to grow.
Related: Evolution Is Essential for Successful Entrepreneurs. Here Are 3 Tactics.
3. Competitive changes
Again, businesses don't exist in a vacuum. If you emerged to threaten an existing business, they'll likely respond with new changes to give them an advantage over you. If you emerged in a market with no similar businesses, you can bet some ravenous entrepreneur will emerge shortly with a slightly better, slightly different model than yours.
These competitive changes can happen quickly, without warning, and if you aren't paying attention, they can cannibalize your business. Make it your prerogative to continually investigate newly emergent companies in your industry, and when you see something new, adapt your business to retain an edge over them.
4. Unmanageable growth
Growth is always a good thing for businesses, right? Not exactly. Some businesses grow too slowly, strangling their profits by neglecting to take risks and eventually never maturing. This is almost universally acknowledged.
What's less frequently acknowledged is the fact that growing too quickly can create similar rifts in your business. Hiring too quickly, expanding too quickly or just hosting too many customers at once can all seriously jeopardize your infrastructure. Instead, aim for steady, manageable growth you can incrementally introduce to your business.
5. Poor leadership
Businesses demand consistent, high-quality leadership from beginning to end. They need a strong CEO at the top, well-informed executives and talented managers working together to establish direction, make decisions and inspire the team to stay aligned.
One gap in this network is all it takes to create a rupture in an otherwise solid organization. For example, one manager that dissents from the prime directive can veer the business away from its course -- and of course, a strange or alienating direction from the CEO can ruin the impressions of hundreds of otherwise loyal brand followers.
Watch out for these sneaky, sometimes un-intuitive flaws in your business. Even if you're sure your idea is a winner, and you're working hard and consistently to support your enterprise, it's possible to succumb to failure if you aren't prepared. Stay focused, stay industrious, but most importantly, stay flexible -- it's the only way you'll be able to respond to unexpected circumstances and still survive.
