What Causes Businesses To Fail In Their Early Years
According to Fundera, roughly 20% of businesses fail within their first year of operation, and about half of new businesses close within five years of their opening. These statistics stay roughly the same year over year which means that economic downturns and policy changes rarely affect whether or not businesses stay open.
When businesses fail, the reasons why often lies within the company itself; something isn’t working properly, and it can’t be fixed fast enough – or isn’t seen at all – and the company eventually closes. Knowing some of the most common pitfalls of new businesses can help a company stay on track and maintain a healthy, functioning business for years to come.
Cash flow problems
82% of the time, poor cash flow contributes to the failure of small business This can appear in many different ways. Businesses may have:
- Failed to properly anticipate their expenses, or over anticipated their income.
- Spent too much on inventory, hiring, and systems, leaving them without enough liquid cash to pay bills.
- Gotten behind on accounting tasks and not realized what was in the company coffers until it was too late.
As you plan your business, overestimate expenses and underestimate income. Make sure that you have enough liquid cash reserved to make it through the first year; it generally takes at least several months for a business to become profitable.
Companies often believe that business insurance policies are an unnecessary expense. In fact, failing to be adequately insured can easily cause a small business to fail – and can even affect the personal finances of an owner.
Remember: There were approximately 2.9M nonfatal workplace injuries and illnesses reported by private industry employers in 2016. If a company doesn’t have worker’s compensation insurance, they will generally be forced to pay that bill out of pocket. This can easily destroy a small company, especially if the employee must be reimbursed for time out of work.
Companies often spend a great deal of time figuring out exactly who their ideal client is but fail to recognize how they will connect with this person. In the planning stages of marketing, businesses should not only identify who is their target market but also find reasonable and cost-effective ways of connecting with that market.
Are there targeted message boards or Reddit threads that should be used? Are there places where targeted ads might be beneficial? Which social media profiles will be most effective?
Business owners can easily get overwhelmed if they try to do everything for their business. In the earliest phases, it can be close to impossible to contract out work, but owners should quickly identify the tasks that are taking up the most of their time while offering the least reward and find employees or contractors to handle that work.
Creators also need to make sure that they take time for themselves. Even in the busiest of times, it’s possible to find a few minutes to read a book, watch a favorite movie or TV show, go for a hike or a walk, or go out with friends for a social event. Many successful executives would even say that this sort of recharge time is necessary.
Poor sales funnel
Another reason businesses suffer is by having a poor sales funnel. Companies often spend a great deal of time creating interest in their products but don’t have much of a chain leading from that initial interest to a final sale. Businesses need to plan for various events in the journey from the prospect or lead to customer.
Sales teams need to be equipped with appropriate information, customer service needs to know how to answer questions and concerns, and websites need to be updated with frequently asked questions. Understanding the buying habits of the modern digital customer is crucial. Plan for customers who are going to spend a great deal of time educating themselves, and make sure the materials they need are easily available.
In the early days of a startup, a company is often just a handful of people. Making a bad choice in a single hire has the power to cause tremendous problems for the company. This is even truer when you’re looking at potential co-founders. Friends may not be the best people to start a company with.
Businesses are often most successful when their teams are diverse; friends are often friends because of their common interests and approaches to situations. Making the right hires – and choosing the right co-founders – can be the first and most important step towards building a business that will last through the years.
Knowing these common mistakes can help you better plan for the future and avoid business failures.