9 SIMPLE FACTORS THAT LEAD TO BUSINESS FAILURE
Dr Soul Loren
“An Economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today”
In these tough economic times, many businesses are struggling to stay above water. This article explores the 10 contributing factors of business failure.
The factors listed herein are common problems, but somehow often neglected by entrepreneurs. When you are starting a new business, the last thing you want to focus on is failure. But if you address the common reasons for failure up front, you will be much less likely to fall victim to them yourself. Expert opinions abound about what a business owner should and should not do to keep a new business afloat in the perilous waters of the entrepreneurial sea. There are, however, key factors that -- if not avoided -- will be certain to weigh down a business and possibly sink it forevermore.
Few business failures stem from a single cause. One cause may predominate, but inadequate responses to several interrelated factors typically lead to a company's failure. I will like to illustrate these contributing factors by using the example of the much sought after food and beverage business (which in my opinion will provide an easy reference for most readers).
Among the common types of small businesses in Malaysia, the restaurant business produces the highest failure rates. Sad but true, at times, restaurant owners are forced to sell their business to other operators to minimise their losses.
What are the contributing factors?
First: Wastage Of Basic Material
- In the restaurant business, the main factor that can contribute towards a higher cost is the wastage of cooking ingredients. Wastage is quite common as most of the materials used in the F&B line are perishable... e.g. vegetables, fish and meat. Wastage is a “silent killer” and will drain the restaurant of its’ resources.
- If the purchase, storage and usage of these food materials are not controlled properly, it will be a contributor to the losses.
- Losses from wastage cannot be seen clearly because it happened during the preparation process. Only good and experienced chefs and kitchen staff are able to help to reduce the wastage. Monitor closely the flow of your stocks ---and that will give you a clue on how to reduce wastage.
Second: Not Understanding The Needs Of Your Customer
- I have encountered many restaurateurs are not focused on the needs of customers—They simply do not understand what their customer’s expectations are –And most of the time, they are very confident that their end products are of high quality and do not take criticism openly.
- Always take constructive criticisms with an open heart. Your customer’s expectations and requirements must be seen and appreciated from the “wide angle” ---- and by doing so, it will help you to increase the quality of your services.
- Customers are also very sensitive to any decline in the quality of the products or services and will not hesitate to leave restaurants that do not meet all their needs and preferences. Therefore, as a restaurateur, you should be more careful in matters involving customers. If you fail to understand the needs of customers, it simply means you are ignoring the question of quality of your service --- and this is a sign that your business is at risk of failing.
- Each customer has their own list of restaurants or eating outlets.... And if you fail to understand your customers, chances are, you will be sending them to your competitors.
Third: The Failure To Understand Competition
- Many restaurateurs are inclined to open their restaurant in a popular location that is likely to bring a higher patronage of visitors. Sometimes these restaurateurs are willing to pay premium rental rates to secure their preferred locations.
- But somehow restaurateurs may overlook one crucial element...i.e. To examine the actual state of competition if they opened their business in places like that.
- They fail to assess the strengths and weaknesses that they have to face the competition with other traders, particularly of the business of the same type. Chances are, they may be competing with more established competitors who have sufficient resources to compete in the location. Are you in the position to withstand fierce competition? Will the premium rental rate drain you of your resources?
Fourth: Weakness Set Sale Price
- This is indeed a very common problem that occurs in any kind of business... where many restaurateurs do not pay attention on the question of the sale price.
- Restaurateurs prefer to set a price according to the profit and loss angle of the company and not be seen from the angle of the ability of buyers or users.
- If something is done based on the Value Profit & Loss Account of the Company, it will adversely affect your own business, where you will not be able to attract many customers to patronise your place because your pricing is beyond or outside the market value.
- As an restaurateur, you need conduct a survey of sales prices which is performed by other restaurants...and this step is necessary to update the sales price that you are offering.
- In this survey you will be able to see precisely the position of your sales price in the market and it may help you to eliminate your own future down fall.
Fifth: Failure To Remedy Weaknesses
- Many restaurateurs fail to stay afloat simply because they have a “weakness for action” to remedy an inherent weakness in their business. It is either they do not feel it was very important to take immediate action or simply, they do not know what the best way to solve it. Either way, they are putting their business at risk. Issues such as bad customer service and inconsistent quality in food must be remedied immediately.
- Many F&B businesses are set for failure at the initial stages of their operations ... when restaurateurs made the wrong choice in employing unsuitable candidates as employees. This is because each business requires different skills and knowledge to operate and manage it.
- If you select the wrong candidate you are jeopardising your operations --- as they might not be able to perform or carry out their duties and responsibilities. For example, if you hire an inexperienced cook or kitchen helper, you are bound to encounter problems in terms of material wastage and quality control.
- Hiring the wrong candidate to man your front line is another taboo for restaurateurs. A good example is this can be found in restaurants that hires foreign workers as its frontline personnel ... while most of these workers are hard working, some of them may find it hard to communicate with the local customers, especially in the ordering of food. Chances are the foreign workers may get the customer’s food order wrong and in turn, customer’s attributes this to be bad customer service.
- · Some restaurateurs make last ditch efforts to resurrect their ailing business-, at the time when the restaurant’s ’ financial problems began to run out ---and sadly, their efforts may come a little too late. In reality, they face an uphill task as they may have already lost their regular customers and they no longer have the edge in competition.
Six: Weakness Choosing The Right Workers
- It is of crucial of importance for restaurateurs to select the right candidate for the right job, as he is likely to avoid a host of problems such as issues of mismanagement, wastage and bad customer service... and if you as the owner do not have experience to managing the restaurant, then stay out and let the someone more competent to take on the task.
Seven : Weakness in Planning
- If you do not know where you are going, you will never get there. No clear picture of success will lead to status quo or worse. To grow and be successful you have to actively work on your business. As the saying goes, failing to plan is planning to fail.
- You should have short term and long term plans in place before venturing in your business. You will also need to be realistic about the amount of time you will need to invest in your new venture. Sales and profits will increase with time, but you will need to plan how your business will survive before you start making money.
- You should also have a plan on how to go about achieving your goals. Plan even the smallest details well in advance. Would you jump in the ocean without knowing how to swim? Of course not. Good planning will provide you with the best chance for survival in the future and a way to avoid common failures.
Eight: Mapping Failure Marketing Strategy
- The importance of having a marketing plan is reiterated in every textbook, dissertation, thesis, lecturer jargon and classroom that teaches marketing and management. It is demanded upon by CEO's, bosses, managers and marketing teams simply cannot survive without it. A marketing plan gives you focus, so you know where the shortfalls are and what you have to do. Once everyone has a clear idea of the marketing plan, then roles can be delineated and the plan can go forth in full swing.
- If your restaurant does not have the right marketing strategy or a comprehensive approach to target your customers, you are likely to encounter obstacles in your business, especially in the early stages. Stated simply, you can be the best chef in town, but in the absence of marketing, it will take a long time before your culinary talents will be noticed.
Nine : Failure To Monitor The Progress Of The Company
- Failure to monitor the progress of your restaurant is probably the biggest sin in business. Conduct periodic analysis on your performance and monitor closely the direction of your business ...and please be honest with your self. Are you making any positive progress in your business? Do you foresee your restaurant making profits in the near future?
- If you never do the monitoring of your business progress and performances, you will not know which direction your business is facing.
- The monitoring discipline of your company should be done with full discipline and cannot be consider as non-important issues or not important for businesses.
To find out more about the practical aspects of managing a business, visit my website at
Dr Soul Loren, editor of TIPsNIAGA.COM
The author is a freelancer and his areas of speciality will include :