According to statistics published in 2017 by the Small Business Administration (SBA), about one-fifth of business startups fail in the first year and about half of all employer establishments fail within five years. Only about one third survive ten years or more. Those statistics are rather grim. And while there are a multitude of conditions that can result in a business failing, most small companies that go out of business make similar mistakes.
“It’s not the plan that is important, it’s the planning.” Dr. Graeme Edwards
The life of an entrepreneur is unforgiving. It is a constant challenge. There are many moving parts. Any one of them could put you out of business.
#1. You start your business for the wrong reasons
The reason for business failure is often tied to the reason the owner started the business. Is your primary reason for starting your own business the desire to make a lot of money? Do you think that if you have your own business that you’d have more time with your family? Or maybe that you wouldn’t have to answer to anyone else? While those are benefits some successful entrepreneurs achieve after years of hard work, they are not reasons to start a business.
The right reasons for starting a business – reasons that lead to building a successful company include these:
- You have a passion and love for what you’ll be doing, and strongly believe — based on educated study and investigation — that your product or service would fulfill a real need in the marketplace
- You have drive, determination, patience and a positive attitude. When others throw in the towel, you are more determined than ever.
- Failures don’t defeat you. You learn from your mistakes, and use these lessons to succeed the next time around. Studies of successful business owners have shown they attributed much of their success to “building on earlier failures;” on using failures as a “learning process.”
- You thrive on independence, and are skilled at taking charge when a creative or intelligent solution is needed. This is especially important when under strict time constraints.
- You like — if not love — your fellow man, and show this in your honesty, integrity, and interactions with others. You get along with and can deal with all different types of individuals.
#2. Poor Management
Many a report on business failures cites poor management as the number one reason for failure. New business owners frequently lack relevant business and management expertise in areas such as finance, purchasing, selling, production, and hiring and managing employees. If the business owner doesn’t recognize what they don’t do well, and seek help, the company many fail and go out of business. To remedy the problem, small business owners can educate themselves on skills they lack, hire skilled employees, or outsource work to competent professionals.
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 the continuing study of market research and customer data, an area which may be more prone to disregard once a business has been established.
A successful manager is also a good leader who creates a work climate that encourages productivity. He or she has a skill at hiring competent people, training them and is able to delegate. A good leader is also skilled at strategic thinking, able to make a vision a reality, and able to confront change, make transitions, and envision new possibilities for the future.
#3. Insufficient Capital
A common fatal mistake for many failed businesses is having insufficient operating funds. New business owners often don’t understand cash flow or underestimate how much money they will need for startup and they are forced to close before they have had a fair chance to succeed. They also may have an unrealistic expectation of incoming revenues from sales.
It is imperative to ascertain how much money your business will require; not only the costs of starting, but the costs of staying in business. It is important to take into consideration that many businesses take a year or two to get going. This means you will need enough funds to cover all costs until sales can eventually pay for these costs. This business startup calculator will help you predict how much money you’ll need to launch your business.
#4. Location, Location, Location
Your college professor was right — location is critical to the success of most local businesses. Whereas a good business location may enable a struggling business to ultimately survive and thrive, a bad location could spell disaster to even the best-managed enterprise.
Some factors to consider:
- Where your customers are
- Traffic, accessibility, parking and lighting
- Location of competitors
- Condition and safety of building
- Local incentive programs for business start-ups in specific targeted areas
- The history, community flavor and receptiveness to a new business at a prospective site
#5. Lack of Planning
Anyone who has ever been in charge of a successful major event knows that were it not for their careful, methodical, strategic planning — and hard work — success would not have followed. The same could be said of most business successes.
It is critical for all businesses to have a business plan. Many small businesses fail because of fundamental shortcomings in their business planning. It must be realistic and based on accurate, current information and educated projections for the future.
Components should include:
- Description of the business, vision, goals, and keys to success
- Market analysis
- Potential problems and solutions
- Work force needs
- Financial: capital equipment and supply list, balance sheet, income statement and cash flow analysis, sales and expense forecast
- Analysis of competition
- Marketing, advertising and promotional activities
- Budgeting and managing company growth
- In addition, most bankers request a business plan if you are seeking to secure addition capital for your company.
#6. Over Expansion
A leading cause of business failure, over expansion often happens when business owners confuse success with how fast they can expand their business. A focus on slow and steady growth is optimum. 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 a good cash flow, let your success help you set the right measured pace. Some indications that an expansion may be warranted include the inability to fill customer needs in a timely basis, and employees having difficulty keeping up with production demands.
If expansion is warranted after careful review, research and analysis, identify what and who you need to add in order for your business to grow. Then with the right systems and people in place, you can focus on the growth of your business, not on doing everything in it yourself.
Simply put, if you have a business today, you need a website and a social media presence. Period.
#7. No Website and No Social Media Presence
In the U.S. alone, the number of internet users (approximately 88.5 percent of the population) and e-commerce sales ($394.9 billion in 2016 according to the US Census Bureau) continue to rise and are expected to increase with each passing year.
At the very least, every business should have a professional looking and well-designed website that enables users to easily find out about their business and how to avail themselves of their products and services.
If you serve local customers, your website should include your address, phone number and hours of operation, and should be listed in Google My Business so it will show up when shoppers search for what you sell by location.
Even if you don’t have customers come to your place of business and/or you get most of your business through networking and referrals, you need a website so potential customers can research your business before they call you. If you don’t have a website and your competitors do, you’ll lose out.
You need to have social media profiles on the services your clientele are most likely to use for the same reason. If you don’t, you won’t look professional and will lose business to competitors who do at least have profiles on popular social media sites.
If you have products that can be sold online, or you can take orders online, that’s an added benefit. But at bare minimum, you need a website that lets customers know what you offer and how they benefit by doing business with you.
When it comes to the success of any new business, you — the business owner — are ultimately the “secret” to your success. For many successful business owners, failure was never an option. Armed with drive, determination, and a positive mindset, these individuals view any setback as only an opportunity to learn and grow. Most self-made millionaires possess average intelligence. What sets them apart is their openness to new knowledge and their willingness to learn whatever it takes to succeed.
In Conclusion
Few places are less forgiving than the business world. Eventually, everything adds up. If your customers prefer your competitors, your employees would rather work for someone else, your partners no longer believe in each other or the business, and the many mistakes you can make along the way. And that is why businesses fail.
Yes, it is true that most businesses fail. It is also true that many of them succeed. Those that succeed are not the result of miracles. Entrepreneurs who lead businesses to success understand that it takes a carefully planned and executed strategy. A little luck also helps.
Here is my seven pieces of advice aim to promote the likelihood of success for any business organization.
1) Behind every great company is a great leader. According to McBean, great leaders know how to define their goals and create a plan to direct their company to achieve those objectives. Leaders should have a vision of what that strategy is and how to put it into action. Employees tend to follow the type of work habits, philosophy, and direction their business leader practices.
2) Leaders should know the ins and outs. Great leaders must know what every employee does and understand their day-to-day operations. A successful company needs management that can look for ways to make processes more efficient. McBean advises business owners to point out improvements and be clear about consequences when employees deviate from policies and procedures. If a business owner is not strict, he/she will lose control of the company.
3) Money matters. The most important factor in how to avoid business failure is protecting the company’s financial assets. Businesses must be aware of their investments and closely maximize their profits. McBean warns if you aren’t aware of your company’s investments, they may unpleasantly surprise you and cause you more hurt than gain.
4) Plan for the future. Business leaders don’t have a crystal ball, but they can make educated predictions and plans for action. McBean gave the example of Ford Motor Company. Before the financial downfall in 2008 and 2009, Ford restructured its debt and raised funds in its cash reserves. McBean says this thoughtful move saved its skin during the meltdown.
Its competitors, on the other hand, GM and Chrysler, ran out of money and needed taxpayer bailouts to avoid bankruptcy. Remember to think ahead and plan for the unexpected.
5) Stay current and know your brand. Once you’ve built a great product or service, know how to market yourself. McBean encourages new businesses to invest in a solid marketing budget to ensure consumers are aware of the product or service. Take the time and energy to invest your marketing funds into a strategy that works for your target market.
6) Be competitive. A new business must adopt the mentality that its success is contingent on winning battles. You have to fight to the top if you want to succeed. If you don’t, McBean warns, your competition will beat you to the prize.
7) Focus on your principles. General business practices apply to all industries. Don’t get too narrow-minded about specific fields and forget common sense. According to McBean, business owners must understand all aspects of the business. If you’re not an expert in accounting, tax law, finance, or management, it might be wise to seek advisement. You don’t want to make crucial mistakes in these areas.
By following this advice, any company can learn how to avoid business failure. McBean doesn’t believe entrepreneurs will succeed if they don’t understand these key concepts and apply them in their business practices. Leaders can learn from those who have gone before them and make wise decisions.
Thank you for reading
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