4 Reasons Businesses Fail And How To Avoid Them

October 24, 2015

12:06 pm

Depending on who you ask, between 50% and 80% of new businesses fail within the first year or so of operation. As a hopeful entrepreneur, you may see statistics like that and be confident that you will be one of the successes, but how do you make sure that happens? Let’s look at some of the reasons that businesses fail, and how you can inoculate yourself against them.

Cash Flow

Many small businesses struggle to maintain adequate cash flow to pay all their bills, especially as they work to gain their first 100 customers. Some businesses have just enough money saved or loaned to cover start up costs, and then fall apart quickly when the business they’re hoping for doesn’t surface.

What can I do about it?

  • Plan ahead Ideally, have three months of business expenses sitting in the bank so that you can weather slow times, especially until you get the hang of your business’s seasonal rhythms (Hint: All businesses are seasonal, unless you’re doing business in legal gray areas).
  • Cash on hand If you can’t maintain three months of expenses, then it’s absolutely necessary that you watch cash on hand like a hawk. Make sure that every dollar you’re spending is working to build your business.
  • Keep customers to lowest terms possible Sometimes you don’t have a choice of when your customer pays, especially if you’re working in the B2B world, but if you can keep invoices due when they’re written, instead of net 30 or net 60, you’ll be happy that you did.

Branding Failure

In the modern market, your brand is your life. Without it, everything else falls apart. If you fail to communicate a clear and concise brand to your customers, you will not convince them that you’re a worthwhile business to work with.

What can I do about it?

  • Decide on your brand and stick to it If your goal is to offer better shipping terms than everyone else, figure out how to do it, and don’t compromise.
  • Write it down It’s easy to hedge on your brand when it’s all in your head. To commit more strongly, write it down as part of your business plan, and even share it with your customers. Let them call you on it when you screw up.

Founder Failure

We all hear stories about how much entrepreneurs work in the early years of their business, but there’s a difference between hearing about 80 hour weeks, and working 80 hour weeks. Some people crack under the pressure, or find that they can’t handle the commitment.

What can I do about it?

  • Commit to your business, but have a life. Burnout is most likely if you don’t do anything other than work. Even if you’re working from dawn to dusk, commit to at least one thing each week that’s just for you. A day at the gym, a family dinner, drinks with friends. Remember why you decided to go on this crazy trip, and find time to recommit to your mission.
  • Have outlets for your frustration. Your friends and family may be willing to listen to you vent, but they might not have enough context for why your concerns are so, well, concerning. Connect with your local chamber of commerce or SBA chapter to find other entrepreneurs to talk to about what you’re struggling with.

Financial Mismanagement

Not all financial mismanagement is malicious. This can be as simple as not keeping up to date with your accounting, not planning ahead for taxes, and not keeping an accurate eye on employees.

What can I do about it?

  • Use professional accounting software. If you’re not sure where to start, start by using professional accounting software to track income and expenses. From there, you will have a better idea of what you need to be looking for on a daily basis to move forward.
  • Make this part of your daily routine. The longer you put off your accounting tasks, the more frustrating they will be. By dealing with this daily, you make sure that your information is up to date. Also, by having professional accounting practices in place, you make yourself look better to angel investors, lenders, and customers.

Many startup businesses close each year, but plenty succeed. Increase your odds of success by knowing what the risks are and planning ahead for them.

What is your number one business success tip for new entrepreneurs?

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Margarita Hakobyan is a serial entrepreneur that is addicted to creating. Business women, wife and mother of two with bachelor's degree from the University of Utah with a concentration in International Studies and a Masters Degree also from the University of Utah with a degree in International business. CEO and founder of MoversCorp.com, an online marketplace of local moving companies and storage facilities.

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