When an entrepreneur embarks on their journey to build the next big thing, they will undoubtedly come across the “statistics” that we’ve heard a thousand times. You know the ones where 50% of businesses fail within a year and 95% are gone within five years. But just what is it that causes these new establishments to go belly up? Here is a list of the top five drivers based on our experience helping new companies navigate those early startup waters:
5. You start your business for the wrong reasons. The thought of being your own boss is cool until the first major issue comes up. Is the sole reason you’re starting your business because you want to make a lot of money? Do you think if you had your own business that you’d have more time with your family? If so, you’d better think again. Running a business is hard work – often much harder than what you have previously been doing to earn a living (especially if you’re coming from an office job). With that said, when times get tough (mentally, financially, spiritually, etc.) you need to have a firm resolve as to why you’re in this game. If your reason is planted on a weak foundation, don’t be surprised if you find yourself quitting before success has had a chance to begin.
4. Lack of Planning. Anyone who has ever been in charge of an event knows that that were it not for their careful, methodical, strategic planning (and hard work) success would not have followed. The same should be said of most business successes. Many small businesses fail because something which was very fundamental to their success (such as marketing or customer seasonality) was not thoroughly understood and addressed. If for no other reason than to flush out these potential sticking points, we always recommend that a new entrepreneur take the time to prepare a business plan. Besides, most lenders will request one if you’re seeking to secure capital for your company so you might as well go through the exercise.
3. Over-expansion. A leading cause of business failure, expanding too quickly, often happens when owners confuse success with how fast they can grow. Thus, a focus on slow and steadily planned growth is far more ideal. Many a bankruptcy has been caused by rapidly expanding companies.
At the same time, you do not want to repress growth. Once you have an established solid customer base and good cash flow, let your success help you set the right measured pace. Some indications that expansion may be warranted include the inability to fill customer orders/requests in a timely manner and employees having difficulty keeping up with production demands. If expansion is what you need to succeed, identify what and who you need to add in order for your business to grow.
2. Poor Management. Many a new business owner often find themselves admitting that they know how to make the product or deliver the service , but lack management expertise in areas such as finance, purchasing, selling, production and hiring/managing employees. Unless they recognize what they don’t do well and seek help quickly, many owners may soon face disaster.
Neglect of a business can also be its downfall. Care must be taken to regularly study, organize, plan and control all activities of its operations. This includes continually staying in touch with market research, customer data and of course the financials. The moment that that you take your eyes of the game so to speak is when your competitors will take the opportunity to make their move. Thus, new owners must always be aware of what’s going on or risk sinking their ship!
1. Insufficient Capital. The most common yet fatal mistake for many failed businesses is having insufficient operating funds. Many owners often underestimate how much money is needed to weather the start up phase and are forced to close before they even have had a fair chance to succeed. Some also may have an unrealistic expectation of incoming revenues from sales, which can exacerbate the situation.
Before you begin your venture it is imperative to ascertain how much money your business will require. We’re not talking about only the costs of starting your endeavor, but the cost of staying in business. It is not uncommon for a business to take a year or two to get going. This means you will need enough funds to cover all your expenses until sales can eventually pay for these costs. To start, we’d recommend using a business start up cost calculator such as this one or setting up a consultation with a local accounting firm or CPA. Many will be happy to talk with you as no one wants to see a business fail.