People or groups of individuals start companies or businesses all the time. Unfortunately, nearly half of these companies fail within their first two years, according to United States Bureau of Labor Statistics. Small and large companies alike can be prone to business failures. There are a number of reasons why companies fail, including a lack of money and poor planning. Sometimes, even the management team is responsible for company failure.
Lack of Capital
Many companies underestimate the amount of capital that they need to start or run a business. It takes money to buy and use supplies, hire employees, advertise and rent office space. Capital can also become a problem during economic downturns as banks may raise their requirements or be less likely to finance certain businesses.
Poor Business Plan
Another major reason companies fail is due to a poor business plan. Business owners and partners must study the strengths and weaknesses of their competitors and be able to estimate their own market share for the first few years. Companies also need to decide how to price their products, which advertising vehicles they plan to use, how much they plan to spend on advertising and if there are other products they could produce or markets they could realistically enter.
Poor Management Decisions
Corporations often hire people to run various departments such as brand, advertising, finance or business development. Additionally, senior management, including CEOs, make major decisions on mergers and acquisitions, implementing sales strategies and increasing product distribution. However, company leaders and department heads occasionally make the wrong decisions, which costs the company money. Whether they lacked experience or failed to research changes in consumer tastes, one of the top reasons companies fail is because of poor management decisions.
Another top reason that companies fail is because they over expand, according to the article "Why Do Many Small Businesses Fail?" at allbusiness.com. Some companies try to acquire other organizations or buy up a product line. Sometimes the expansion costs become great liabilities and cut into profits.
Companies in retail can fail because of a bad location. The location may be bad from a socioeconomic standpoint, or new businesses and construction can sometimes hinder sales and profits. Corporations may pay exorbitant taxes in one area when they could be enjoying certain tax breaks in another location of the city. Bad location is usually the result of poor business planning.
Another top reason companies fail is because of poor marketing or advertising. A company may introduce a product that fails in the marketplace because of a lack of marketing research. Another company may be using the wrong advertising mix, perhaps relying too much on expensive, fragmented television advertising when Internet and sales promotions would be more effective.
Underestimating the Competition
Companies often fail because they underestimate the strength of their competitors. Companies should occasionally conduct a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis, where they analyze the strengths and weaknesses of their competitors. That way the company can be more flexible in making adjustments or changing their strategies.
Failure To Change with Times
Technology and consumer demand changes over time. For example, people who once flocked to purchase video tapes for their VCR eventually started buying DVDs as the technology changed. Any company that continues selling an outmoded product will ultimately fail. Not changing with the times is another top reason for company failures.
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