It’s scary to start a new business. Data shows that 50% of all small businesses fail in the first five years of business, and 20% fail in their first year.
Whether you’re starting your first business for your tenth, you know that it’s going to be an uphill battle and that success is never guaranteed. But the good news is that much research has been done into why small businesses are failing, and many danger points have been identified for a potential entrepreneur to watch out for.
Here are just a few of the reasons small businesses fail (and what you can do about it).
Lack of Capital
A recent study showed that 36% of small business owners said that raising capital was their number one concern—and that’s after they jumped the first hurdle of getting the business started.
There will come in the life of the business many costs: purchasing inventory and equipment, paying the lease, marketing, wages, operating costs and more. Just making payroll can seem like a Herculean task some months.
It’s also difficult for businesses to manage the price of goods sold. They may not know the price point at which their product will both turn a profit and entice buyers. In highly saturated markets, this is even more critical.
A business that is competing based on price alone may quickly find that they’ve priced their goods at too low for too long. And just as any household needs a budget that weighs expenses against income, a business needs to do the same; if they’re not pulling in enough revenue, they’re bound to shut their doors.
There’s also the danger of taking out the wrong kinds of loans to get started and using the money in a way it wasn’t intended.
A line of credit may be good for buying inventory, but if a business tries to use it to finance equipment purchases, they can quickly realize they’ve made a mistake. The same goes for taking out a loan with a balloon payment with no clear picture of how to make that large payment when it comes due.
Knowing the right loan for the right purpose is essential.
Lack of a Business Plan/Poor Management
It’s one thing to have a “million dollar idea”, but running a company is something else entirely.
To begin with you need to know exactly how you’re going to run your business, how you’re going to price goods, how you’ll pay the bills, and how you’ll spread the word. If you merely have a good idea, but no management skills, you won’t get very far.
This is why it’s important to get the right people in the right roles.
A great chef might make amazing food but be a mess with pricing, so she should hire a manager who can run the numbers and take care of the office work. Likewise, a computer programmer could have the latest and greatest tech invention, but no way to market it.
Hiring the right help—or bringing them on as co-owners and partners—is essential to the success of a small business.
According to the Small Business Administration (SBA) problems with inventory are one of the main reasons that small businesses fail. Poor forecasting can lead to shortages (which won’t satisfy customers) and overages (which leads to spoilage or obsoletion).
U.S. retailers are sitting on $1.43 in inventory for every $1 of revenue they bring in. This leads to waste, and waste isn’t sustainable.
The best way to overcome this issue is to use software that was specifically designed for inventory management, or point-of-sale (POS) systems that track inventory and provide feedback as to what products are moving and what are remaining stagnant.
On the flip side of a company that struggles to open its doors and last through the first year is the business that sees major success in their original location and gets the idea to expand too quickly.
Expansion is almost always done through taking out more loans, and there are many factors that could affect the new location: it may be in a poor location, it may oversaturate the market with your product, and it just may simply hit a rough patch in the economy and you’re on the hook for twice the loans, inventory, and staff.
Being smart about expansion is something that can be helped, again, by bringing in an experienced partner who has done this kind of thing before and knows the pitfalls and how to get around them.
It may sound counterintuitive, but just as there’s such a problem with too few customers, there’s an equal problem of too many. Not being able to properly balance your marketing needs—not getting the word out and leaving your staff twiddling their thumbs, or getting mass business that is dissatisfied with your inability to serve them—is something that can crush your business.
Realistic approaches to marketing (figuring out how much to do and where to do it) will result in sustainable success that will be beneficial to you and your small business.
For help in starting your small business: