The first three of the reasons businesses fail were discussed last week. This week's article continues with the other three reasons.
According to Small Business Administration research, only half of new businesses survive for the first five years and only one-third of new businesses are able to survive for 10 years. The inverse is compelling as we can conclude that if only 50% of new businesses survive for the first five years, then the other 50% fail in the first five years. We can also conclude that about 65% of new businesses don't make it to the ten-year mark.
Forbes reports an even more grim statistic, based on Bloomberg research, that of every 10 businesses, eight fail within the first 18 months. What are the reasons businesses fail to thrive, given a 50/50 chance of survival and assuming a product or service for which there's a demand?
Three More Reasons Businesses Fail and How to Avoid Them:
4. Unprofitable Business Model.
Akin to leadership failure is building a business on a model that is not sound, operating without a business plan, and pursuing a business for which there is no proven revenue stream. The business idea may be good but failure may come in the implementation of the idea if there are no strategic guidelines in place.
How to Build a Good Business Model: Research and review the way other businesses in the industry operate. Develop a complete business plan that includes financial forecasting based on predictable revenue, strategic marketing, and challenge management solutions to overcome potential obstacles and competitor activities. Create a milestone chart with specific tasks and objectives assigned along the timeline so you can measure success, solve problems as they occur, and stay on track. A sound business model that incorporates best practices can help your business avoid failure.
5. Poor Financial Management.
SmallBizTrends.com, a business news resource, offers this infographic which states that 40% of small businesses make a profit, 30% come out even, and the remaining 30% lose money.
You must know, down to the last dime, where the money in your business is coming from and where it's going in order for your business to succeed. Your business can also fail if you lack a contingency funding plan, a reserve of money you can call upon in the event of a financial crisis. Sometimes people start businesses with a dream of making money but don't have the skill or interest to manage cash flow, taxes, expenses, and other financial issues. Poor accounting practice puts a business on a path straight to failure.
How to Avoid Financial Mismanagement: Use professional business accounting software to keep records of all financial transactions, including every expenditure and all revenues received, and use this information to generate profit and loss statements. This is valuable information that you need to run your business, know where you stand at all times, and keep it operating in the black. If you lack skill in financial management, consider hiring a tax advisor and professional bookkeeper or certified public account to help manage your financial affairs.
6. Rapid Growth and Over-expansion.
Every now and then a business startup grows much faster than it can keep up with. You open a website with a trending product and suddenly you are inundated with orders you are not able to fill. Or perhaps the opposite is true. You are so convinced that your product is going to take the world by storm that you invest heavily and order way too much inventory and now you can't move it. These are both additional paths to business failure.
How to Avoid Growth and Expansion Problems. Business growth and expansion take as much careful and strategic planning as managing day-to-day operations. Even well-established and successful commercial franchises such as fast-food restaurants and convenience stores conduct careful research and planning before opening a new location. They measure local and regional demographics and spending trends, future development plans for the area, and other pertinent issues before they move forward. You must do the same for your business to avoid failure.
Conduct thorough research to ensure the time is right and the funding is available for expansion. Make sure the initial business is stable before expanding to an additional location. Don't order inventory you're not sure you can sell but have a plan already in place to fill orders quickly should the demand present itself. The key to successful growth and expansion—and avoiding business failure—is strategic planning.
If 50% of new businesses fail, then 50% of new businesses can succeed. Starting a business is an exciting endeavor that requires a clearly defined product or service and a strong market demand for it. Whether you desire to start a new business or you're already running a business, you must understand that success depends on careful strategic planning and sound fiscal management that begin prior to startup and continue throughout the life of the business.
An archive of SBDC Business Reports can be found at http://www.grantcountybeat.com/index.php/archived-items.
Be one of the 50% who succeed! Western New Mexico University's Small Business Development Center assists entrepreneurs who are starting a business or wanting to expand an existing business. We will help you to formulate a business plan that will crystalize your ideas into real action. These services are available at no cost. Call 538-6320 for an appointment with a business advisor, or email sbdc@wnmu.edu. The SBDC office is located in Watts Hall at 500 18th Street, at the intersection of Swan and Silver Heights Blvd. An appointment at your office is available by request. More information may be found at www.nmsbdc.org/silver-city.
The WNMU campus along with the SBDC office will be closed for Fall Break and Thanksgiving during November 23-27.
Contact the SBDC office for information about the following event:
- December 2 – "How to Start a Business"