Avoid the Four Common Causes of Business Failure

"Each year there are generally between 150,000 and 190,000 new businesses launched in the United States. On the other hand, there are also between 50,000 and 100,000 failures each year as well" (Ebert & Griffin, 2007, p. 84-85). Consequently, before anyone decides to start a business, he/she should take a moment to create a plan of action that will help him/her avoid the four main causes of failure for new companies: (1) managerial inexperience or incompetence, (2) neglect, (3) inadequate control systems, and (4) not enough capital. Basically, this plan of action will help him/her to better appreciate some of the challenges that new business owners tend to overlook or underestimate. And finally, any information discovered during this process allows the new business owner to craft a more developed, more effective business plan (Ebert & Griffin, 2007).

The first challenge that every new business owner must overcome to avoid failure is managerial inexperience or incompetence. Often, business owners lack the necessary experience and/or knowledge necessary to manage their new business and its various resources. As a result, someone must be brought in to complement the owners' skills. For example, they may choose to find a partner that does have adequate managerial skills. However, since new business owners have countless tasks to complete on a daily basis, many business owners choose to hire a manager or a team of managers even though they have the skills to manage the company themselves. No matter how business owners choose to address this potential problem, they must ensure that whoever is managing the business has the experience and/or training to adequately oversee the operations and resources of the company (Ebert & Griffin, 2007; Toolkit Media Group, 2008b).

"Regardless of its size, a business is only as strong as its leadership" (AllBusiness.com, 2008, p. 1). For that reason, a company cannot be strong without a strong management team. An effective management team must tackle each major area of a business: (1) accounting, (2) customer service, (3) industry-specific challenges, (4) information technology and computers, (5) manufacturing, (6) marketing, (7) operations, and (8) sales (AllBusiness.com, 2008, p. 1). A solid management team must also share the same dream for the business and be able to work smoothly together. On the other hand, though, an excellent management team should also be made up of individuals that can contribute unique skills and perspectives to build a well-rounded and creative environment (AllBusiness.com, 2008).

After considering all of this information, I have put together some suggestions that I feel will help new business owners build a solid management team. First, they must decide which aspects of their company they are willing and able to handle directly. Then, they will need to outline the responsibilities of and skills needed for each of the areas that are remaining (AllBusiness.com, 2008). Once that is complete, they should advertise these positions and start screening all applications and resumes for possible candidates. It is imperative during this stage to develop an effective interviewing process that will help weed out those applicants that are merely good at presenting themselves well on paper. This process should include such things as (1) interviewing each of the more promising candidates twice, (2) having more than one interviewer at the interviews, and (3) developing a set of questions that will help the interviewers effectively screen the applicants (BusinessTown.com, 2003). Finally, once the best applicants are hired, they must (1) train these individuals in the basic managerial functions-"planning, organizing, directing, and controlling" (Allen, 1998b, para. 2)--, (2) clearly explain each of their individual responsibilities, and then (3) monitor their activities on a daily basis to avoid any serious issues in the future (Ebert & Griffin, 2007).

Next, they will have to deal with a second challenge: neglect. Too many new business owners fail to appreciate how much time and effort it takes to create a successful business, so they end up neglecting their company (Ebert & Griffin, 2007). Countless new business owners fail to realize that they will have many more duties to perform each day than simply providing their company's products or services to customers. Ultimately, there are numerous other indirect responsibilities that must be fulfilled to keep the business running successfully, such as collecting sales and payroll taxes, recording all business transactions, tracking the company's progress and planning for its future, and collecting accounts from customers. In the end, anyone planning to start a business should carefully consider and then outline all of the different responsibilities that will come with the new company to see if they will be able to handle all the time and effort that must be spent to keep the business operating (Toolkit Media Group, 2008b).

Weak control systems are the third risk that new business owners must plan for. "Controlling is a four-step process of establishing performance standards based on the firm's objectives, measuring and reporting actual performance, comparing the two, and taking corrective or preventive action as necessary" (Erven, n.d., introduction section, para). Controlling is an essential part of management and concludes the management cycle. It is designed to show that all business plans have been implemented properly and also reflect whether or not these plans are realistic. In the end, the best control systems cover every important aspect of the business and are carefully designed to be firm enough to find and correct or even prevent problems, while flexible enough to cause additional problems (Allen, 1998a). Most importantly, though, proper controls also reinforce any and all conduct that meets or goes beyond the company's performance standards (Erven, n.d.).

Because of the importance of controls and their intricate, much time should be spent planning out this area. First, the owners must create business objectives that are clear, precise, and realistic since these objectives will be directing all their company's controls. From these objectives, they will then be able to establish clear performance standards, stating what they expect from their company and how much deviation from these standards will be acceptable. In addition, they will need to make certain that all important areas of our business have adequate controls (Allen, 1998a; Erven, n.d.). Essential controls for the average business include the following:

Cost controls

Employee performance controls

Equipment controls

Financial controls (i.e., budgets)

Material controls

Operations controls

Time controls (i.e., deadlines) (Allen, 1998a).

Lastly, business owners need to ensure they have enough capital to launch and maintain their new company before they actually undertake the new venture. Realistically, "in most cases, it takes months, even years" to begin earning a profit (Ebert & Griffin, 2007, p. 87). Obviously, this requires individuals to calculate an estimate of how much it will cost to establish and then run their business for at least a year or so. Next, they will have to search for adequate funding from various different sources to cover these costs. Since most conventional lenders are reluctant to offer loans to new companies because of the risk, new business owners may need to be creative, such as looking to family members or searching for private entrepreneurs, to meet both long-term and short-term costs (Toolkit Media Group, 2008a; Toolkit Media Group, 2008c).

References:

AllBusiness.com. (2008). Create a winning management team. Retrieved 23, 2008, from http://www.allbusiness.com/business-planning/business-plans-management-team3791223-1.html

Allen, G. (1998a). Controlling process. In Supervision. Retrieved July 22, 2008, from Dallas County Community College District Web site: http://ollie.dcccd.edu/mgmt1374/book_contents/5controlling/ctrlproc/ctrl_process.htm

Allen, G. (1998b). Managerial functions. In Supervision. Retrieved July 22, 2008, from Dallas County Community College District Web site: http://ollie.dcccd.edu/mgmt1374/book_contents/1overview/managerial_functions/mgrl_functions.htm

BusinessTown.com. (2003). Hiring & firing - Streetwise tips on hiring. Retrieved July 23, 2008, from http://www.businesstown.com/hiring/hiring-advice.asp

Ebert, R. J., & Griffin, R. W. (2007). Business essentials (6^th ed.). Upper Saddle River, NJ: Prentice Hall.

Erven, B. L. (n.d.). Controlling. Retrieved July 22, 2008, from Ohio State University Extension, Department of Agricultural Economics Web site: http://www.ag.ohiostate.edu/~mgtexcel/Control.html

Toolkit Media Group. (2008a). Quick chart for financing sources. In Small Business Guide. Retrieved July 23, 2008, from http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P10_1200

Toolkit Media Group. (2008b). Roles you'll be expected to play. In Small Business Guide. Retrieved July 23, 2008, from http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P01_0250

Toolkit Media Group. (2008c). Startup small businesses. In Small Business Guide. Retrieved July 23, 2008, from http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P10_1113