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Why Entrepreneurs Fail

by Ken Vincent, Featured Contributor

A RECENT STUDY showed that for every 100,000 new businesses started 120,000 went out of business. Of course they didn’t all fail, but the vast majority did. With so many people, especially the younger set, wanting to start their own businesses it is time we considered why new companies fail.

The most common reason (50%) for failures is lack of capital and or profit. Too many new entrepreneurs don’t understand several factors in this matter. First, capital is not the same as debt. Taking on more debt through borrowing or leasing when a business is failing simply hastens the downfall. Capital is what an owner (s) invests in the company and startupsdoes not burden the enterprise with defined returns on the investment or a pay back schedule. In other words it is ownership money that is at risk. Raising capital is not the same as securing more debt.

Then one must understand that profit and cash flow are not the same thing. It is possible, and is often the case, for a company to show a profit but still fail for lack of cash flow. The cash that should be available when the company is turning a profit is often tied up in inventory that isn’t turning, accounts receivable, and purchases that are capitalized. Payroll, benefits, utilities, taxes, debt service and other obligations require cash to satisfy them. Paper profit doesn’t do the job.

Another common cause of failure is internal conflict. Partners, while in full agreement at the starting point do not always continue to agree. This is particularly true where friends and or family are part of the mix. Failure to have an ownership or buy/sell agreement can be the downfall of a new business.

As a business grows it can sometimes fall on hard times because the entrepreneur (s) doesn’t want to give up management control. Not all entrepreneurs are good managers. This failure to bring in new talent and relinquishing some day to day control also contributes to another cause of failure, that being burnout. An entrepreneur can only sustain 80-hour workweeks and all the stress and pressure so long before the system buckles and the one-man show fails.

Of course, we can’t ignore the failure to have solid business plans, budgets, and marketing plans either. Too many new entrepreneurs find doing those things, and keeping them updated, are just plain boring and opt to not do them. They become companies that are lost in the wilderness and have no goals, or defined paths to achieve goals. They flounder around until someone takes their place. This failure is sometimes contributed to by too much reliance on one or a small number of major clients. This can give a false sense of security and when a major client/customer goes away disaster looms.

Certainly there are other factors that cause a new business to fail. What have you seen that caused or contributed to a failure?


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Ken Vincent
Ken Vincenthttp://sbpra.com/KennethVincent/
KEN is a 46 year veteran hotelier and entrepreneur. Formerly owned two hotels, an advertising agency, a wholesale tour company, a POS company, a leasing company, and a hotel management company. The hotels included chain owned, franchises, and independents. They ranged in type from small luxury inns, to limited service properties, to large convention hotels and resorts. After retiring he authored a book, “So Many Hotels, So Little Time” in which he relates what life is like behind the scenes for a hotel manager. Ken operated more that 100 hotels and resorts in the US and Caribbean and formed eight companies. He is a firm believer that senior management should share their knowledge and experience with the next generation of management.

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