About 20 percent of small businesses never make it to their second year—that's according to Small Business Trends. Of course, making it through year one is no guarantee of long-term success. That same report found that only 70 percent made it to the third year and 62 percent to year four. Only 56 percent survived to their fifth year.
Think about it. Almost half of all new businesses can't make it for five years—and that's the optimistic view. Bloomberg's assessment is far more dire—their analysis indicates that about 80% of entrepreneurs who start businesses fail in the first 18 months.
Why do so many businesses fail?
Businesses fail for a variety of reasons. For some, it is lack of adequate planning. For others it's poor cash flow or running out of money, choosing the wrong staff or trying to sell products for which there's no audience in the marketplace.
Related resource: free cash flow template
Every business is different, and each faces its own set of challenges. That said, some reasons for business failure are more common than others:
Being an effective leader for your business means many things, from modeling smart management skills to making good decisions, understanding the value of compromise and effectively delegating authority. Above all, strong leaders know how to listen to other points of view and incorporate them into improved business strategies.
Not being distinctive in the marketplace
What sets you above your competitors? What do you do better than they do? Do you offer consumers enhanced quality, lower prices or more effective customer service? You need to understand what constitutes your uniqueness and shape it into your brand and value proposition, then present those values and the promise you make to consumers consistently, through your marketing, website, print materials and customer service.
Not listening to your customers
Even businesses which do well out of the starting gates sometimes make the mistake of taking their customers' needs and concerns for granted. Far from being a slight on your business, the problems and complaints your customers tell you about represent ways to make your business stronger. Listen when they talk to you (in person, through customer service staff and on social media sites), conduct customer satisfaction surveys and fix whatever issues are slowing down your growth.
Not having a detailed business plan
Constructing a smart business plan isn't a pro forma exercise—it's critical to your success. Yet only a few have developed the necessary strategy and action plan to get there. The US Small Business Administration can be helpful in creating your plan, as can Focused Energy.
It should contain, at a minimum, an executive summary, company description, market analysis, description of your management team and products, marketing strategy and financial projections.
Weak financial management
According to SmallBizTrends, about 40 percent of new businesses make a profit, 30 percent break even and 30 percent lose money at the start.
Usually the difference comes down to the strength of their financial management. You need to know the source of money coming into your business, and how you're spending it. You should also have a smart contingency funding plan—this is money held in reserve which you can use if you experience a financial crisis.
Need better financial management? Get a free consultation.
Growing too fast
This might sound counterintuitive, but rapid, early growth can hurt your company's longevity.
For example, let's say your product is a big hit with prospective customers. Now, you get a flood of calls and orders you're not ready to handle, resulting in poor customer service. This is where a detailed market analysis before your business opens can be helpful. It will tell you what volume of sales you're likely to make (based on the nature of your target audience and market demand), enabling you to plan for the growth your likely to experience.
Moreover, as you start to grow and expand it's important to focus on operating efficiently and effectively. Are your teams talking to each other? Is business strategy still in line with your mission? Keeping your organization aligned and efficient can curb growing pains.
What is organization alignment? Why it matters.
Avoiding business failure
Starting a new business isn't for the faint of heart. The process can be fraught with unforeseen difficulties and unexpected challenges. But remember this: although many new businesses fail, many others succeed.
If you create a smart business plan, execute it effectively and continue to properly plan along the way, your new business can be one of those which makes it.
The good news is that there are companies like ours which can help. Learn more about the ways our consulting team can help you make smart financial and operational decisions for your company: contact Focused Energy today.