7 Reasons New Businesses Fail

It is exciting to start a new business, be the boss, and take command of your financial future. Unfortunately, many businesses do not make it long term. Those plans for a comfortable retirement from selling a successful business never come to fruition. According to the U.S. Bureau of Labor Statistics, businesses fail at these rates over time:

  • 20% in the first two years.
  • 45% in the first five years.
  • 65% during the first ten years.
  • Only 25% of new businesses make it to 15 years or more.

The reasons for these failures includei:

  1. Not understanding your market and prospective customers.

This is more about common sense than sophisticated business market analysis. What is your business, what are you selling and for how much? Who is your customer, their characteristics, and their ability to afford your product or service?

If you believe that what you must sell is in demand in your market area and you know there are enough prospective customers with the money to buy it, that’s a start. Then look at your competition. Do you have something that differentiates you from them to help you compete? If not, do you deliver better quality in products or services? All these questions are important, and they can help you to make a better plan to assure success.

  1. Lack of a well thought out business plan.

Your business plan can be informal, but you must know from your market research that there is enough business for you in your market area. Then you should have a written plan of how you will produce or deliver your product or service. Plan for your costs of operation and management. What do you expect for revenue your first year, and will that fund your costs with profit left over?

Once you have your costs and income calculations, set out a budget and follow it. Do frequent checks as you get going to see if you are on budget, on both the expense and the income sides.

  1. Lack of adequate financing.

You may be starting off with some borrowed money. If so, is there adequate backup funding if you run short? If you are not borrowing money to get started, it does not mean that you will not have a need for a loan. If your income and costs are in line with your plan, but you hit a snag that you believe is temporary, have a line of funding ready to keep you afloat. This is where you need to be careful and have a realistic view of the situation. You do not want to go into debt or increase it unless your business plan is working, and you can pay back your loan.

  1. Poor business presence on and/or offline.

For a brick-and-mortar business, the old “location, location, location” saying is in play. Is the location close to other businesses that will draw your type of customers? Will your business be easy to find, and make sure to get it registered with Google for mapping by name, not just address?

For all businesses, and especially online freelancing, is your online presence working for you? Do you have a business website? Many smaller service businesses rely on Facebook for their business online presence. This works but is very limiting as to what you can do for online marketing. Also, though it may not seem that way, not everyone uses Facebook. Setting up your own website is not difficult and using free WordPress software with hosting can cost less than $100/year.

  1. Becoming complacent.

When starting out, the small business owner or solopreneur is watching everything, making sure customers are happy, and working on getting to profitability. As success grows and the business is doing well, it can become easy to relax the oversight and just let things roll along. That can be a fatal mistake. You should be constantly surveying customers, asking for suggestions to improve your service or products, and keeping tabs on spending. All the things that were important in setting up your business plan are still important in the future.

  1. Uncontrolled expansion.

It can be easy to get that “I’m on a roll” feeling when the business is growing. Every day it seems like the business is just flooding in and there is nothing but good news. If you maintain inventory, you may want to be careful not to get over-confident and buying too much. That quantity discount will not help if business falls off and the inventory sits stagnant.

There are other issues and decisions that can cause you to lose sight of the details when the big picture is rosy. You can outrun your cash flow, creating a need to borrow that could have been avoided.

  1. Assuming expert tax advice is too expensive.

Taxes can place a much greater burden on the business than necessary. Why work long hours and days for profitability and then give up a larger percentage to taxes than necessary. The right accounting and tax services can increase your bottom line despite their cost.

i Top Reasons for New Business Failures – Investopedia.com

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