Sep 18

Why do many small businesses fail?

Two-thirds of new businesses survive for at least two years, and only 44 percent survive at least four years. Why some businesses fail and why some succeed is a matter of debate, although there are some common mistakes that can sink a business in no time.

What is really interesting too is that the Directors of the new business or the owners in all my experience never blames themselves; it’s always someone else’s fault – always.

Give your new business venture a fighting chance by taking care to avoid these fatal errors:

  • Overexpansion. Wanting to be the first to market with a new product, taking on added overhead, and the need to demonstrate revenue growth to anxious investors can all induce businesses to overextend themselves financially. Rather than head down this path, start with realistic goals and allow yourself to grow as needs dictate. Let your revenue, not pie-in-the-sky projections, dictate your hiring practices.
  • Poor capital structure. Look at the businesses that fail and you’ll find that many of them took on too much debt. Learn to pay strict attention to your finances and keep careful records of all money coming in and going out. Even if everything’s coming up roses today, trouble can still be right around the corner.
  • Overspending. Many startups spend their seed money before cash has begun to flow in at a positive rate. This often happens because of misconception about how business operates. If you’re just starting out in business, seek out seasoned veterans you can bounce your ideas off of prior to making big financial commitments.
  • Lack of reserve funds. Failing to prepare for volatile markets and uncontrollable costs like energy-rate increases, materials, labor, natural disasters, and the like is another top reason many businesses fail. Make sure you protect your investment and keep enough reserve cash to carry you through market downtrends and seasonal slowness.
  • Bad business location. Don’t let a cheap lease tempt you into opening your doors in the wrong neighborhood if your gut is telling you it’s not right. Key factors to consider include competition (how many other similar businesses are located nearby?) and accessibility (is the area well served by freeways, public transportation, and foot traffic?).
  • Poor execution and internal controls. Poor customer service, accounting controls, and overall employee incompetence can all combine to bring down the ship. Make sure you and your employees place a premium on customer service to generate repeat business, establish protocols for how tasks should be accomplished, and remain continually in the know on all things accounting.
  • An inadequate business plan. Your business plan is your blueprint for success. A well-thought-out business plan forces you to think about the future and the challenges you’ll face. It also forces you to consider your financial needs, your marketing and management plans, your competition, and your overall strategy for coming out on top.
  • Failure to change with the times. The only constant in business is change. Once mighty behemoths fall to earth while unknown upstarts rise to prominence. The ability to recognize opportunities and be flexible enough to adapt to changing times is a key ingredient to surviving and even prospering in the toughest business climate. Therefore, learn how to wear multiple hats and to generate new interests and areas of expertise.
  • Ineffective marketing and self-promotion. Customers can’t walk through your front door if they don’t know you’re there. Learn how to cost-effectively advertise and promote your business through such tried-and-true methods as direct mail, ads in local newspapers, Web sites, blogs, even by sponsoring a local little league team. The number of advertising and promotional ideas that exist is only limited by your own creativity.
  • Underestimating the competition. Consumer loyalty doesn’t just happen; you have to earn it. If you don’t take care of your customers, your competition will. Watch your competition as closely as you do your own employees.

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