Chances are that if you start a business, you won’t make it past the five-year mark. Yikes! I’m not trying to be a Debbie Downer, but statistics show that small and medium-sizes companies fail at an astounding rate.
Sixty-eight percent of companies with fewer than five employees and 48% of those with between 5 and 99 employees will fail within five years of their start-up date. Many experts believe that as many as 500,000 U.S. companies fail every year. Wow.
So why are up to 80% of all start-up businesses failing within five years? What are the contributing factors and how can you avoid them? Here are the top ten categories that can lead to business failure:
- External Factors
It should be no surprise that the root of all these business evils is money, or capital. This is the most common reason businesses fail. Too often a dedicated business owner (let me raise my hand here) believes that commitment, hard work, and passion will be enough to compensate for the lack of funding. Very seldom is this true.
As a general rule, you want to have enough capital to pull you through at least the first six months of operations, more if there will be a lapse between the business starting and opening (for example, if you start your business January 1, but due to construction and renovations at your location, you don’t actually open to the public until March 1).
Be aware, also, that banks and loan officers are aware of the staggering failure rates, too, and are often loathe to provide credit lines to new business ventures.
Mismanagement and poor budgeting techniques are also huge culprits in capital starvation.
Underestimating your financial requirements is a common mistake for new business owners! Want to read about a few more common mistakes and how to avoid them? Check out my blog, Five Mistakes New Business Owners Make HERE.
Why did you start your business? Was it because you had a passion or felt a need within the market or was it because you wanted to be a manager? Probably the former.
Most entrepreneurs start businesses because of an interest or technical skill they want to share, NOT because they want to work in the role of manager. And because of that, many entrepreneurs lack managerial skills that are essential for running a business.
Yes, you can gain insights from people such as your CPA or financial advisor, but usually that advice comes in the form of a quarterly review, not a real-time assessment, and you definitely need both.
Too many owners/operators/managers lose track of their systems and processes because they are focused on daily operations, rather than big picture and preventative (proactive) problem- solving. Because they are more comfortable in their own expertise, they often let the managerial side take a backseat, when what they should be doing is either effectively planning their strategies or outsourcing. (Also see my article Five Professionals Your Business Needs to Hire).
Print, social media, broadcasting, and so much more. Marketing, advertising, and profits go hand-in-hand. We all know that if a business does not advertise, then no one will know it is there and no one will buy the good or service (no matter how incredible it is).
Marketing, however, is more than just what your social media is doing. Marketing starts with research, including identifying the market’s need for your good or service.
- Is your market changing too fast for you to keep up?
- Is your product obsolete?
- Is your niche far too small or restricted?
You may want to consider these questions before you take the leap into entrepreneurship. Market examination and analysis are absolutely essential when starting a new business.
Want some tips on where and how to market? Download a FREE copy of 150 Ways to Market Your Business HERE.
Since when was growing your business a bad thing? Well, it can be if you do it too quickly and without the proper financing.
There is such a thing as too much success. When a new entrepreneur sees growth, they often want to jump on the train to expansion without checking the coal reserves. Businesses fail when their rate of growth exceeds their liquid assets and financing.
Expanding beyond your resources is a great way to go bankrupt! There will always be unforeseen shifts in your business and the last thing you want is to bite off more than you can chew. A good manager (see above) will know how and when to pursue a new opportunity.
Planning is boring. It is also critical to your success. If you are considering opening a new business, and even if you already have, a business plan will act as your guide. Navigating the road to success is a whole lot easier with a map, after all!
80% of failing businesses do not have a business plan. – Dun & Bradstreet
A well written business plan will ultimately help you:
- Focus your energy
- Analyze your business (for better or worse)
- Clarify your business objectives
- Develop effective and efficient strategies to deal with the expected and unexpected day-to-day
- Identify future financial and managerial needs
Best practices for creating your business plan:
- Keep it simple
- Remain flexible
- Know your strengths and weaknesses
- Know your competition
- Know your industry
- Set specific, measurable goals
- Revisit your business plan regularly
I can’t tell you how many business owners I know who barely have a spreadsheet of expenses, let alone an accounting system. It’s maddening…and a little bit heartbreaking. So much can be determined, and avoided, with the use of excellent bookkeeping.
Now, I know administrative systems can seem tedious and confusing, but the information gained from these systems can dramatically affect a business’ bottom line. Uncleared checks, sloppy inventory management, misdirected purchases, and unpaid invoices are just a few of the irritations that can be avoided with proper bookkeeping.
For example, I once reviewed a client’s “books” to discover that they had over $50,000 in uncollected payments. $50,000! Imagine what a mistake like that could do to your cash flow!
The point is, you need to get your accounting accounted for. Might I suggest Quickbooks.
Location. Location. Location. It’s worth repeating. Where you are located could be as important (if not more so, in some cases) than what you are actually selling. Things to consider when you are looking at a location:
- Traffic flow
- Surrounding businesses
- Surrounding demographics (commercial, residential)
- Turn-over (how many businesses have been in this spot before?)
- Reason the former tenant left (did the landlord jack-up the rent?)
- Former business demographic (was your new daycare formerly a toxic waste facility?)
- Hidden fees (CAM, taxes, percentage leases, etc)
You’d be a fool to think you have no competition. And it is not enough to simply acknowledge that competition exists. When planning a business start-up, you must dive deeply into the competition. What are their strengths and weaknesses? How could they affect your business? How could opening your business cause them to shift theirs?
That last question might be the most important. How could opening your business cause your competition to shift their own? Will they engage in ruthless tactics? Will they offer discounted pricing or promotions? Will they become aggressive in their attempts to lure your clients? It sounds harsh, but I’ve seen it first-hand!
You are experiencing steady growth and you decide to make some larger investments in new equipment, only to be blindsided by your top five grossing clients announcing they are moving out of the range of your service. Suddenly, you are $60,000 in the hole.
You carry three major suppliers’ retail products. A fire breaks out in their warehouse and suddenly you are out 1/3 of your retail offerings.
The stock market crashes and suddenly all your top clients have decided to take a break from purchasing anything.
Sudden, unexpected, external forces can lead to financial failure. Just like the stock market, you need to spread your company’s investments and redirect when necessary to avoid a total loss.
Can anyone say Covid? No one can truly plan for an “act of God,” but you can evaluate your company’s potential for catastrophic events.
Do you need specific insurance, such as flood? How will your business be affected by an unexpected, disastrous event and what can you do now to help prepare yourself?
With proper planning and a little work, you can ensure that your company makes it past that dreaded five-year mark and into the future of successful business enterprises.
If you’d like help managing any of these concerns, please schedule a clarity call with me!
Disclaimer: This post includes affiliate links, and I will earn a commission if you purchase through these links. Please note that I’ve linked to these products purely because I recommend them and they are from companies I trust. There is no additional cost to you.