Studies suggest that eighty percent of new small businesses fail in their first year. The figure approaches ninety percent by the fifth year. Why do small businesses fail? There have been extensive studies on this matter. Here are the top reasons why.
A Lack of Demand
This can take a variety of forms. They might open a franchise in an over-crowded market. They may start the business in an area where there is no demand for the product or service though there may be demand in other parts of the country. Or someone may mistake a surge of interest in a novel product as proof it will sell long-term. Others may find something interesting in concept but not pay for it.
No Business Plan / Poor Planning
No business plan is best exemplified by someone buying product but having no plan to sell it. At least setting up a website or creating a page on an ecommerce site helps you get started. Poor planning is another common mistake. Perhaps they buy inventory no one wants, or they don’t have the infrastructure in place to deliver it once orders start rolling in.
A related problem is failing to make changes when you realize that your business plan isn’t working. Maybe you opened up a storefront and online sales have taken off. Retail space is expensive. It would be better to move to a cheaper location and shift to only doing online deliveries. Or you may find that your real customer niche is different than the one you’re selling to. The solution includes adjusting marketing messaging and possibly the product itself.
Growing Too Fast
This is a bigger issue for startups with an influx of funding than conventional small businesses. For example, they may receive 100K and immediately buy a bunch of inventory. Or they may get a million dollars and hire people without a plan for how to immediately convert their efforts into profits. In the worst-case scenarios, they rent big offices, hire a large staff and spend money on stuff they don’t need.
A Lack of Cash Flow
This is obvious if you have expenses but no money coming in. It is just as bad to have half as much money coming in as is going out. Businesses sometimes compound the problem by borrowing, since they have to start making payments at some point. Too many firms guarantee their failure by borrowing a lot of money at the start and trying to start big, and then they can’t get enough money coming in to make the payments and make payroll.
How Can You Beat the Odds?
We’ve listed the common reasons why small businesses fail. Now we’ll tell you what you can do to minimize the odds of becoming a statistic yourself.
Avoid Debt Like the Plague
Don’t borrow money to start your business. You’re too likely to overspend on inventory and marketing over what you’d spend if you had to cash-flow it. Starting small and slowly growing also gives you more flexibility to change the business model if necessary, such as when you realize you’re better off selling bottled sauces over serving tacos to customers.
Save Money on Everything
Don’t mistake appearances for reality. You don’t have to start with a fancy desk or a large office. Buy these types of sofas instead, so that people have something to sit on no matter how many have come in. Don’t buy a new car in the hope that it will convince potential clients to do business with you. Drive your current car unless you’re literally in need of a work truck to get the job done. Hire contractors as required rather than hiring full-time staff.
Have a Plan Before You Start
What is your product or service? How are you going to deliver it to your customers? What will you do at the start, whether it is securing business licenses or patenting your product? What complementary services or products could you add to the menu at minimal cost? What business functions are you weak at, and how will you handle it? Don’t be afraid to hire an attorney, an accountant or an engineer when you’re not familiar with something. And if you identify these shortcomings, you can budget for these consultations.