Starting a new business is exciting. You have a passion for your product or service, you think you’ve identified the market for it, and you dive in after doing your research. But the statistics are harsh: a full 50% of small businesses fail within the first five years of operation. By year ten, this number skyrockets to a full 70%! And according to the US Small Business Administration, this number can vary so much that the failure rate can be as high as 95% by year five.
This issue isn’t specific to the United States, either. Figures for Canada show clearly that although 96% of small businesses survive their first year, 7000 businesses go bankrupt yearly. A recent article from Entrepreneur shows similar poor odds: that 70% of businesses fail within their first ten years.
In order to understand how to run a successful business that has a chance of beating these odds, determining the top reasons for failure is important information to have. And having some idea of how to prevent these potential pitfalls in your own company will be the key to unlocking a strong and prosperous business that lasts well beyond the ten year mark.
Here are the top reasons why 50% of businesses fail within the first five years.
Cash flow problems. Clear from the research and survey data taken across a wide spectrum of industries, 82% of new businesses experience cash flow problems, which puts it at the number one reason for the demise of a new company. You need to know before you go into business how much cash you need to live, and how much you need to keep your company afloat, particularly in regards to any potential cash flow issues that may come up. It is important to have a contingency plan in place for any roadblocks. You’ll need enough savings to protect you for at least six months to carry you through until you start making a reliable income stream. And don’t forget adequately anticipating your cash flow in the first place; understand that the time difference between being paid and outgoing expenses can be hugely divergent, particularly at the beginning. 29% of startups revealed that not knowing how best to allocate their cash was a frequent reason for failure.
Lack of planning. It’s easy to be eager and want to jump into your new passion without abandon. But planning is essential for your new business, and this task must be extensive and requires attention to detail and a lot of time and research. Make sure your product is the necessary solution to a problem, and that you have a detailed business plan which includes details like current information and market analysis, as well as informed projections about future growth, marketing, and budgeting. Know the market inside and out, understand your customers’ needs and habits, and be prepared to adjust accordingly. Be sure you have a strategy in place!
Failure to understand your market 42% of small businesses fail due to a lack of need for their product. Is there a market problem that your service can solve? This should be your number one consideration before you go into business. You can have a product with top-of-the-line features and cutting-edge technology, but unless there is a real need for it in the current market, none of that stuff matters. Keeping abreast of market trends is another area which must take precedence for your new company. Remember that this job is never just done; market trends are fluid, so ensure that you are continually reevaluating what’s out there, and how your product can fill a need.
Not doing it for the right reasons. It doesn’t matter how perfect your ideal product can be, if you’re starting a company based on striking it rich without having a real passion for your service, you will eventually fail because you will lose the impetus and enthusiasm for something that never excited you in the first place. Being interested in a service simply from a business perspective is not going to be a winning model. And if you are starting out fresh because you want to experience the heady rush of doing it all yourself, but you haven’t done adequate research or preparation, or you simply lack the skills you really need for your new venture, that’s the perfect recipe for disaster.
Failing to properly track financials. Not only is debt something to avoid at all costs, but equally important is a solid and consistent understanding of where the money is flowing in and out of your business. Watch for overspending by use of careful tracking, and make use of data analysis to protect your assets. Controlling your expenses is a crucial step, particularly when you’re starting out, so seek advice from those who’ve been doing this a while, and curb your spending until you are sure you can afford those assets! Careful and precise tracking will help you to avoid this common pitfall, and save you time and money.
Invoice Tracker can help with any potential cash flow issues you may be experiencing, and prevent future issues by making it easier for you to get paid faster. Its automatically generated reports will allow you to keep an eye on all of the financial information going in and out of your business, any time you want. Check to see which of your invoices are still outstanding, use the ‘set and forget’ automated email reminder sets, and watch your cash flow improve. Try the Invoice Tracker free, 30-day trial today, and get the best possible start with your new business.