5 Reasons Why New Small Businesses Fail

5 Reasons Why Businesses Fail.

It is not a comforting thought that up to 50% of businesses fail within 5 years. It may even put you off from attempting to start your own. While nothing is ever guaranteed in the world of business, you shouldn’t be discouraged by the failures of others. Instead, objectively look at ways to avoid making the same mistakes, and use that to drive success from within your own business. Most mistakes are avoidable, and in this article, we will look at some of the more common reasons why businesses fail.

  1. Not enough planning

Perhaps the most common reason itself is before the business has come into fruition, not enough planning has taken place. Without a significant amount of research you may have failed before you have even begun. You need to ensure you are targeting a sector that has demand. Opening up a bookstore would be a bigger challenge these days, with companies like Borders now ceasing to exist. There will always be a select niche, but that doesn’t detract from the demand declining so much.

If you invest enough time into carefully researching before you dive in, you should get a strong idea whether your area can actually support what you are wanting to introduce. As the saying goes, failing to plan is planning to fail.

  1. Focusing on profits not cash

You may be surprised to find out that many profitable businesses are forced to close. Just because they are making a profit does not mean they have a strong liquidity that can easily pay their creditors. You need to have the money in the bank to pay your bills on time. If you are selling goods on credit where you will not be paid for up to 60 days, you may have debts to pay before you receive that money.

If you aren’t receiving your money before you have to pay your creditors, you are going to have a hard time staying afloat. This underpins why it is essential to have a fully planned out cash flow forecast, and if there is an expected deficit, you can implement a plan of action.

  1. Growing too quickly

While it certainly is great if your company is in a position where you want to expand, you have to tread the path carefully. Expanding too fast can result in many problems all occurring at once. If you are rushing, you may make poor recruitment decisions, lose focus on core operations and reduce the stability of your overall position.

It is recommended to take one step at a time, and only when you are securely ready to move forward to do so. It is tempting to try and expand as quickly as possible, but with so many different components coming into play, you may pay the consequences of running before you can walk.

  1. Economic Downturns

Some sectors more than others are prone to being heavily affected by economic downturns or recessions. All could be going smoothly, but if a recession hits and consumers start spending less your business could be the one that suffers.

The 2007 financial crisis hit small businesses especially hard. People just did not have the same level of disposable income as they previously did. You could try to protect yourself from market forces by creating a recession-proof company, however there is a balance to be struck. Value stores and pawn shops thrive in recessions, whereas hospitality and construction companies generally suffer. You should think about how safe your business in regards to recessions and plan accordingly.

  1. Poorly located

If your company is going to be a retail store than it is integral to get the right location. A bad location could make a fantastically managed and in demand business turn into a disaster, whereas the perfect location could make a bad business strive.

There are several factors needed to be considered. Ask yourself; where are my customers located? How is the infrastructure and accessibility? Is there a lot of competitors close by?

You need to strike an ideal balance between everything. Being located close to your competitors might be a good idea because you know there is demand for your service. Alternatively the competition could be too fierce in that location, after all there are already established companies there.

Make sure you take into account every possibility, look at the situation objectively to give yourself the best chance of choosing the perfect location.