Research conducted by The U.S. Bureau of Labour Statistics reveals that 50% of small businesses fold up by the end of the first year, and by the tenth year, the figure increases to 80%. This data is a huge pointer to the importance of seeking answers to the question of why these businesses fail. This questioning is particularly important for entrepreneurs starting up new businesses.
Business failure occurs for various reasons, some of which may be caused by factors beyond the entrepreneur’s control. Most of the time, however, they occur for avoidable reasons linked to flaws in business models and management. To avoid these, you need to take cognizance of some helpful information.
Thus, this article discusses the most prevalent factors responsible for the failure of new businesses, including how to avoid them and improve the viability of your start-up.
Lack of experience and knowledge required to start up a business.
People who have grand ideas but lack the fundamental knowledge and experience needed to translate them into a successful, sustainable business end up founding many new businesses that do not stand the test of time. They might not have the required skills needed to start up a business in their chosen industry or know how to market their products/services, manage staff properly, or even recruit the right talents to execute their ideas. Thus, they might have great strategies but lack the people and resources to take their business to the next level. Building a successful business requires knowing what it takes. As an entrepreneur, you must fully understand how things work in your industry. There are many ways of achieving this, such as conducting in-depth market research and diversifying your selection of business mentors. However, without the right knowledge, you cannot achieve success in your industry.
Lack of funds for equipment and supplies
Oftentimes, small businesses start their operations leveraging borrowed money from family and friends, which can quickly become unsustainable when it comes to paying for ongoing costs such as rent and staff salaries. Regardless of the lofty or altruistic visions of your business, you still need a steady stream of sufficient funds to cover daily and periodic expenses and sustain operations. Without this, it will be difficult to acquire the equipment and expertise that will facilitate the proper performance and longevity of the start-up.
Poor management skills or no management at all
Many small businesses do not run smoothly from day one because they have no proper management structure in place. This situation often stems from the lack of realisation that a management structure is the lifeline of any new business, irrespective of its grand product or service offerings. Lacking good management skills can have a long-lasting effect on your organization. While it may not be possible to prevent all business risks, having the right management team in place will significantly reduce the odds of your business failing. Thus, good management skills consist of the ability to communicate effectively, stay organized, and create an environment that encourages trust, honesty, and integrity.
Inaccessible business location
Location is a key factor in business success, as it plays a huge role in boosting the long-term performance of a company. For instance, if you are a retailer, the best place to be is where people live, work and play. You don’t have to be the only store in town; you need to be close enough that people have an easy time reaching it. If your business does not fit into this category, then there are other options.
For example, if your business sells something that people need to go and buy right away (e.g., groceries), then it doesn’t matter where they live or work as long as they are close enough to get there quickly once they decide they need something from you.
Poor inventory management
Small businesses usually run into problems at the early stage because they start with a strategy to outsell their competitors by setting very low prices. While this might indeed fetch them more profit, keeping a perpetually high inventory level also means that they will have fewer investment opportunities. It is important to understand that the effect of poor inventory management can lead to losing your customers when you cannot fulfil their demands. You will need to generate income from other sources, which may lead to an endless cycle of credit sales and loans. However, keeping your inventory levels low during the first few months of operation will make it easier to clear all your debt obligations as quickly as possible. You would also be forestalling a lot of financial problems in the process.
Poor record-keeping and financial controls
Poor record-keeping and the inability to manage cash flow rank high among the causes of business failure. It can occur due to a lack of qualified hands or a lack of experience or training within the business. Record keeping entails the processes surrounding the logging and handling of important financial information related to your business. Keeping an accurate record is integral to the success of your business because it helps you minimize losses, manage your company’s cash, and improve your business finances.
Low sales turnover
Nothing brings down a business faster than the inability to make sales. What causes low sales could be poor customer service and insufficient knowledge of your product or service. Therefore, if there are low sales at the start of your business, you will need to re-evaluate your marketing and sales strategies.
The above points provide clear insights into why new businesses fail. Taking conscious steps to avoid the responsible factors will transform your business and help you escape the common pitfalls many other entrepreneurs encounter. The failure or success of a new business is highly dependent on the capacity of the management. Thus, there is a need to undertake in-depth research in every aspect of your business to facilitate your company’s growth and success.
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