Why Many New Businesses Fail – And How to Avoid That Outcome
If you are starting a new business, the last thing you want to focus on is failure. However, by being aware of the many potential pitfalls – and addressing the common components for failure up front – you will be much less likely to fall victim.
The Good, The Bad, and the Statistics About New Business Success
According to the Small Business Administration (SBA), approximately two-thirds of new businesses survive for at least two years. However, only 44 percent of new companies survive for four years. Therefore, it could be said that a new business essentially has a 50 / 50 chance of surviving for five years or more.
These figures are not meant to scare you, but rather to help you prepare for the potentially rocky path that could lie ahead if you are considering opening a new company. One of the biggest obstacles to starting a new business is underestimating the difficulty of the task. Therefore, success can likely be yours - but it is essential to first be patient, work hard, and take all of the necessary steps.
Overcoming Common New Business Hurdles
There are a number of key factors that can play a part in the failure of a new business. If these can be avoided, however, the chances of success will rise exponentially. Some of the most common hurdles can include:
- Under Capitalization – One of the biggest reasons for the failure of new businesses is having an insufficient amount of capital. Oftentimes, business owners can underestimate how much money will realistically be needed – forcing them to close before they have even had a chance to get going. This lack of capital may also stem from having unrealistic expectations of incoming revenue. All businesses should ideally have a sufficient amount of working capital. Therefore, a good tip to go by is to maintain a balance sheet that can support between three and six months of operational expenses. This can help dramatically in providing a financial cushion for an unforeseen crisis.
- Lack of Business Experience / Expertise – Many new business owners start companies because they like or have some experience with the particular product or service they plan to offer. This, however, is not the only experience that a business owner needs. In fact, business owners need to wear several hats in their new company – especially in the early days. For example, many start-up firms do not have funds on hand to hire marketing and accounting personnel. Therefore, the owner may be required to take on all of these roles – in addition to being the product or service provider. Therefore, in most cases, a new business owner should have knowledge and expertise in the areas of finance, accounting, legal, management, insurance, marketing, sales, and customer service.
- Inadequate Market Research – Another reason that many new businesses fail is due to the failure to clearly define and understand their market, their customers, and the buying habits of those whom then are targeting. Therefore, prior to starting a business, it is essential to know the answers to numerous questions such as , “Who are your customers?,” and “What is your biggest competition in the market?” The answers to these, and other pertinent issues, can be obtained via market research. In conducting this important type of research, a great deal of time and money could ultimately be saved in both the short- and the long-run.
Sticking with the Plan
While it is important to have a business plan, there are many new company owners who opt to “wing it.” Unfortunately, success will likely be short-lived if this is the case. A business plan should be considered a “blueprint” for the success of any new business.
A well thought out plan will essentially force a business owner to think about the future, as well as the many challenges that the business may encounter along the way. It will also outline the potential needs of the new company, the competition that may be faced, the plans for marketing and management, and the overall strategy for success. In addition, most lenders and other financial institutions will typically request a business plan from those who are seeking to secure start-up capital for their company.
For anyone who has ever headed up a successful event, it is well known that were it not for detailed and strategic planning, success would not likely have followed. The same can be said regarding most business successes.