The #1 Reason Businesses Fail

What is the #1 reason entrepreneurs and companies fail?

Is it lack of capital? 

I don't think so. A failing business eventually does run out of cash, just like a person at end of life runs out of oxygen. But the world is full of cash and oxygen. The root problem is usually something deeper. Lack of capital is more of a symptom than a reason for business failure. 

Is it poor quality products or services?

I once helped a client buy an ERP software add-on for QuickBooks. It was early in my CFO career and ended up being my first (and thankfully only!) failed ERP implementation. The software was buggy and had insurmountable functional issues. 

You know what? I just looked on the web, and that software company is still in business. (Update: It's still in business!) They operate in a niche market and apparently still find folks to buy their product. 

Conversely, there are stories of companies with an outstanding product or service who didn't survive. Product quality (or lack thereof!) is important, but not a sure indicator of success or failure.

Is it failure to control receivables?

In my mind this is one of the most overlooked issues facing entrepreneurs, but usually not what takes a company down. Entrepreneurs are notoriously poor at managing receivables, but notoriously good at collecting (most of) them in the end. In my experience this isn’t the #1 exit to Failure City.

Is it inability to sell?

Allow me to chuckle at this suggestion! If there’s one thing entrepreneurs are almost universally good at, it’s sales. In fact, the reverse is more true – most entrepreneurs are so good at selling they can temporarily hide major issues by keeping sales strong.

Is it lack of vision?

Some people might argue for this one, and it definitely has merit. Kodak and Nokia (and now maybe Facebook?) come to mind as hugely popular companies that missed a sea change and lost their position in the marketplace. 

On the flip side, IBM and GE found ways to survive change, most likely by modifying their vision.

But I’m skeptical of vision. Yes, you need it, but for the average small business owner, vision is more about responding well to changing market conditions, than it is about predicting or shaping the future. 

Very few people have the ability of Steve Jobs who famously said: "A lot of times, people don’t know what they want until you show it to them." That rare vision made Apple famous (and highly profitable) but isn't overly trainable. 

Plus, the landscape is littered with similar visions that didn't turn out like Apple.

So what is the #1 reason for business failure?

In my opinion, the #1 reason is:

Not running the business like a business.

This grave error happens when the owner or owners are not anchored in financial reality. Instead they are enamored with something else.

This "something else" could be developing their "grand vision" and promoting it at shows and conferences. It might be building their reputation as a successful executive in the community. It could be something material, like having elegant showroom space, or a line of new trucks parked in a row by the shop.

Business owners driven by these metrics generally believe their company is great, no matter what the financial results indicate.

In my experience, that viewpoint tends to end badly.

Here are some classic signs a business is not being run like a business:

1. Little focus on financial statements. Monthly financials aren’t prepared at all, or are looked at in passing. Little effort is made to make financial reports accurate or reliable.

2. Limited accountability. Employees operate with limited direct guidance or oversight. Often, one or more high-level employees are underperforming but the owner doesn't seem to care, or intentionally looks the other way.

3. A sense of entitlement. Owners in these situations often view the company benefits they receive (salary, vehicle, vacation time, corporate travel, etc.) as their "right" as a business owner. Little connection is made between financial performance and owner perks, perhaps because financial performance isn't being measured.

4. Poor understanding of return on investment (ROI) and risk. Decisions tend to be based on feelings or upfront cost. Little thought is put into studiously weighing risks and long-term returns in a logical manner.

Maybe you're thinking: If an owner isn't good at these things, is it possible to delegate this responsibility to someone else?

In other words, does it work to hire a Chief Financial Officer (CFO) or operations manager to ensure the business is run like a business?

Here is the ironic answer:

Business owners who actually run their business like a business, are the ones most likely (assuming their company is of sufficient size) to delegate to a CFO or operations manager. Owners who aren't anchored in financial reality often struggle to see value in hiring someone to help them run the business like a business.

At the end of the day, the owner needs to run the operation like a business. He or she personally needs to care about financial indicators and allow financial results and calculations to weigh into key decisions.

The fine details can be outsourced to finance experts, but the overall concept of running the business as a business must be ingrained in company culture by the owner, because company culture follows the owner.

That doesn't mean an owner who isn't "a numbers freak" is automatically on the road to Failure City. It means that if they're smart, they will identify the weakness, and seek help and training to improve.

I recently started a project for a visionary business owner. In earlier dealings he exhibited most of the classic characteristics of a non-business-minded owner. His business was in trouble because of it. I expected more of the same as we entered the new project.

To my surprise, the owner did a U-turn and started caring about the financial aspects of the deal. He had good ideas about how to be efficient, but kept a laser focus on quality results. He started truly weighing risks and value.

I was impressed! He was learning to run his business like a business!

Failure City doesn't have to be a place of no return. Like most problems, there is a solution for those who are humbly willing to learn.