Here are the top 7 reasons why businesses fail and tips for avoiding them. According to statistics published by the Small Business Administration (SBA), seven out of ten new employer establishments survive at least two years and 51 percent survive at least five years. This is a far cry from the previous long-held belief that 50 percent of businesses fail in the first year and 95 percent fail within five years, Patricia Schaefer of Business KnowHow reports. Better success rates notwithstanding, a significant percentage of new businesses do fail. Expert opinions abound about what a business owner should and shouldn’t do to keep a new business afloat in the perilous waters of the entrepreneurial sea. There are, however, key factors that — if not avoided — will be certain to weigh down a business and possibly sink it forevermore.
1. YOU START YOUR BUSINESS FOR THE WRONG REASONS
Would the sole reason you would be starting your own business be that you would want to make a lot of money? Do you think that if you had your own business that you would have more time with your family? Or maybe that you would not have to answer to anyone else? If so, you should better think again.
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. Unless they recognize what they don’t do well, and seek help, business owners may soon face disaster. They must also be educated and alert to fraud, and put into place measures to avoid it. 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. Business owners underestimate how much money is needed and they are forced to close before they even 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 your business. 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 flavour 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 may include: Description of the business, vision, goals, and keys to success
Work force needs
Potential problems and solutions
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. OVEREXPANSION
A leading cause of business failure, overexpansion 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. 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.
7. NO WEBSITE
Simply put, if you have a business today, you need a website. Period. In the US alone, the number of internet users (approximately 77 percent of the population) and e-commerce sales ($165.4 billion in 2010, according to the US Department of Commerce) 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. Later, additional ways to generate revenue on the website can be added; ie selling ad space, drop-shipping products, or recommending affiliate products.
7 Pitfalls of business failure and how to avoid them
