Reasons for business success and failure
We spend a lot of time on B2Bframeworks looking at criteria for success. We should also consider the other side of the coin – the reasons for business failure. Probably the most frequently listed reason for business failure is poor cash flow management – ie insufficient money coming into the business. Poor cash flow management most probably means that sales are below par and getting cash out of customers is proving difficult.
Certainly a business cannot succeed if it doesn't have cash coming into it. Cash is the lifeblood of every business. However, this neglects a more critical question – is there a demand for what the business is selling? Most businesses begin in a small way, launched by someone who is convinced the world needs a certain product or service. Because the company is small it most probably hasn't considered nor can it afford market research to establish the level of demand, the target audiences and the prices they will pay. So, businesses are established by passionate entrepreneurs who very often become frustrated when the hoped for demand is not realised.
If a business can get off the ground and establish itself for a year or two, there is a chance that it will succeed. The hardest job in a new business is moving the flywheel. Jim Collins famously conceived the metaphor of a huge flywheel which represents the new business. The task of the entrepreneur is to get the flywheel rotating as fast, easy and long as possible. That first push, indeed the second, third and fourth push will be extremely difficult. And then, after a while, perhaps after the hundredth push, the flywheel will turn under its own heavy weight so that little effort is required. Maybe when the flywheel begins to spin freely there are lots of helping hands. Indeed, the spinning of the flywheel now looks effortless and everyone will claim they played a major role in making it turn.
So here's the thing. Businesses fail because there is insufficient demand for the product or service – at least in the way it is being delivered. No matter how much effort is put into turning the flywheel, it won't spin freely or easily. Or, if the flywheel does begin to turn but too slowly, there is a temptation to give up or change direction. Jim Collins calls this "the doom loop".
Good financial management is important in any business but it is not in itself the cause of business failure. No business can be successful without a healthy appetite among customers for what it is offering. Arguably the most important task for any new business is obtaining cold hard objective answers to three questions:
Who will buy my product (or service)?
How much will they pay?
How much will they buy?
Other questions will certainly be relevant. What reaction can be expected from the competition? How will the business be financed? How sensitive is the business to external shocks such as the coronavirus?
However, honest and realistic answers to the three key questions, together with a strong shoulder on the flywheel, is the framework that gives a new business a very fair chance of success.