Nobody starts a business thinking about failure, yet there’s so much to learn from the poor choices people make or the bad situations they put themselves in. While local figures are not available, 20% of businesses in the U.S. wind up in the first year and the number climbs to 70% as they crossed the tenth-year mark. Even if the mistakes don’t sink the business in the first year, they’ll accumulate and eventually consume the entire organisation.
If you want to be part of the 30% who will be celebrating at least a decade of operation, it’s important that you start your business right. The first step is to understand why businesses fail.
Keeping family in the dark
There are entrepreneurs who think that running a business is a personal decision and went on ahead with the startup, assuming that their family, especially their spouse, will give their unwavering support. But when the business got into trouble, they had to handle not just the business problems, but also the tension in the family.
Such friction can distract you from solving issues to keep your business afloat. Worse, you might lose your business and family.
Your family is an indirect stakeholder of your business too. If things go well, they get to live a better life, but when the ship sinks, they, too, suffer the consequences.
Before you start your business, talk to them about the costs involved, including the intangible ones.
- Do you intend to take a loan?
- How long do you think it’ll take for your business to break even?
- Will you be more absent from home?
It’ll be perfect if you can get their complete buy-in. Otherwise, discuss with them and win their hearts gradually.
Not discussing the worst-case scenario with your business partner
Many startup partners are close friends and family members who think that they know each other well enough to not have to talk about specifics, particularly responsibilities and expectations. As time goes by, they realise that nobody’s perfect and disagreements may arise. When things turn sour, some of them even took their partners to court, simply because the terms were not discussed right at the start.
Such financial costs and emotional strain can be easily avoided if all parties involved in the business can get over the initial excitement of starting the business and discuss things with a level head. It should be documented in black and white at the start what each partner is going to do, how much effort and money are everyone going to put in and what happens when one partner wants to withdraw or when the company closes. That is to avoid a future situation when things turn ugly and lawyers need to be hired to resolve the issue.
It’s best if all the business partners can agree to draft an agreement at a lawyer’s office. Otherwise, having the points of agreement written in an email and have all parties acknowledge it would suffice.
Hiring someone you cannot fire
It’s notoriously hard for startups to hire, especially when the first few employees usually have to take a pay cut yet still work long hours. Some entrepreneurs would employ their family and friends for reasons such as trust and proximity.
While it is easier to turn to them, remember that you’re hiring an employee to perform a job (or three). Instead of considering how easy it is to hire them or how agreeable they are to work for you, you should be thinking about whether he or she is a good fit for the company and can perform the tasks that are important to the business.
It’s good news if they are a good fit. But when the time comes you have to fire them, would you bear to do it? Are you going to feel guilty about it long after? Will you want to spend time reconciling the damaged relationship?
It’s never a good idea to jeopardise good personal relationships over the business. If you’re not good at mending relationships, don’t even hire people who are close to your heart.
Embarrassed about money matters
There are business owners who avoid talking about money, especially with clients they consider friends. They’d allow them to delay payment month after month at their own expense or waive additional charges for additional work.
Remember that there are other stakeholders in your company – your partners and employees – who have put in the time and effort to run the business with you. You may be a nice guy, but when the time comes that you need to chase for payment, you have to do it. Otherwise, if the company sinks, so do all these other stakeholders. Just like a boxer who may be a nice person in private, he’s expected to dish out KO in a ring because he has a family to feed.
Paying attention to profit rather than cash flow
The common misconception that entrepreneurs have is profit is king. But profit is a figure governed by accounting rules and interpretation, which can give an illusion that a company is doing well. It is entirely possible for a “profitable” company to run out of cash and fold. Such a company is as stable as a sandcastle.
A company that’s in the red yet have ready sources of cash, such as from a fresh injection of funds from a new investor, delaying payments to creditors or receiving prepayment from clients, is definitely in a better position. The cash flow gives the business breathing space to iron out issues.
As Alfred Rappaport puts it: Cash is a fact, profit is an opinion. A figure on paper is not going to save your business like cold, hard cash can.
This post was originally published on SBO under the title ‘5 reasons why businesses fail‘