The Real Reason Businesses Fail

Many business professionals will claim that the number-one reason for small business failure is the lack of start-up capital. And it’s true; lots of startups meet their doom because they don’t have enough money to get things up and running. Many have to tell their stakeholders that they have to close down because the bank wouldn’t lend the money needed. Or maybe they couldn’t get that loan they wanted from the Small Business Administration.

But one could argue that there’s another reason: not just a lack of financial capital but also a lack of intellectual capital.

Sometimes, companies fail because people don’t think. Yes, money makes a difference, but look at it this way: a company goes into business to meet customer needs. And those needs adapt and change over time. The most successful businesses respond accordingly. But thinking about those needs and how to meet them in a cost-effective way takes a vast amount of intellectual capital.

It happens all too often: the business has a robust cash flow, maybe even more than it knows what to do with. But because of poor management, people are allowed to make decisions that aren’t smart, and suddenly, that money starts hemorrhaging. Meanwhile, a new business with very little money manages to bootstrap its way out of that “small businesses fail” adage because the owner got incredibly creative and made smart decisions.

Intellectual capital can make all the difference when financial capital is running thin.

4 Questions to Ask to Dodge Small Business Failure with Intellectual Capital

To be fair, not every person has the same amount of intellectual capital at their disposal; some people are just naturally smarter or more creative than others. And that’s okay. Thankfully, with the right questions, anyone can help boost their intellectual capital enough to keep their business plan running as smoothly as possible.

What did the business learn yesterday?

This sounds simple, but a big part of small business management (and just being an evolving human being) is assessing the day’s lessons. Maybe a business owner tested out a new marketing strategy last week, and today they learned it had mixed results. Or maybe they learned that part of their customer base prefers one of the services they haven’t been highlighting. Or perhaps they learned that a competitor moved in a mile away.

These lessons can have value, but only if a new owner recognizes them for what they are.

How can the business apply what it learned?

This question follows closely on the heels of the previous one because lessons are only valuable when a business owner takes the time to apply what they’ve learned. Maybe a business owner realizes that they can drive future sales by adapting their mixed marketing strategy by keeping the slogan from the campaign, but presenting it on different channels. Perhaps the business owner who realized their customer preferences had shifted could transition nearly half of their available staff to help meet the increased need for that product. Maybe the owner with the new nearby competitor could do some market research to ensure that they can still stand out.

What can the business expect to learn today?

Whenever someone starts a new venture, it can be easy to focus on everything that needs to be done. There are business cards to make, employees to hire, technology solutions to buy, and investments to make. And tackling those tasks is a huge part of creating a new business.

But entrepreneurs with ample intellectual capital don’t get too bogged down in their to-do list; they’re always looking for things that they can learn about their business, about the market around them, and about what their customers need. When an entrepreneur constantly focuses on what they can learn, they’re already mentally poised to spot things that they might miss if they were buried in concerns about financial capital alone.

What does the business need to change in the first year? The next?

The survival rate for new businesses is pretty abysmal. According to the Bureau of Labor Statistics, roughly 20% of new ventures fail in their first year. Smart business owners don’t get tunnel vision with their operations. Yes, they spend a lot of their mental energy finding new clients, building their branding, and selling, selling, selling. But as they put in that hard work, they keep a forward focus. They constantly evaluate what they need to change, both in their first year of business and in the next.

This even applies if a business owner finds themselves facing rapid growth right from the start. While that’s uncommon, it happens. And it would be all too tempting for that business owner to believe that what they’re doing is working and will always work in the future. But the prudent owner tries to anticipate what they might need to change down the line. While no one can predict things perfectly, constantly asking “What can I change next year?” can help anyone keep an agile, intellectually adaptable approach to their business decisions.

In short: the best business owners do focus on the money, but they also take advantage of their own intellectual capital to make smart decisions today and in the future.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.