The statistics on business failure within the first 5 years of life are truly sobering for anyone considering starting a business. Just in case you’re wondering, that failure rate is 95% within the first 5 years. So here are the top 3 reasons why businesses fail, and a few hints on how you can avoid these pitfalls.
Failure to Control Cash flow
Not surprisingly, not having enough money is by far and away the most common reason for business failure. However, what not many people know is that it is quite possible, even common, for businesses to fail even though they are profitable. The cause? Cash flow.
It doesn’t matter how much you are owed by clients or customers, if you don’t have money in the bank when your own suppliers and employees need to be paid, sooner or later you’re going out of business.
That is why it is extremely important to watch outgoing expenses and keep overheads as low as possible for as long as possible. Be slow to hire and quick to fire, do not splash out on fancy offices and keep stock levels at the minimum possible. Possibly even consider working through a virtual office if your business allows it, as rent is often one of the highest overhead costs a business incurs.
Failure to Target a Profitable Market
The internet abounds with blogs full of feel good advice such as ‘do what you love and the money will follow’, however the reality of the situation is that unless you target a market that is willing to pay for your service, you cannot and will not succeed. You could have every single other factor in your business perfected, but without customers willing to pay, you simply cannot create a successful business. You may think at this point ‘Facebook and Google are free, and they make huge amounts of money’, but that is just a confusion between who is the customer and who is the product. The real customer of Google and Facebook are advertisers, and you the people are the product. ‘If you’re not paying for it, you are the product being sold’.
How to avoid this issue? The simplest answer is to target a market that people are already selling to profitably. Of course that means going up against established competition. You can test new markets with dry marketing runs or market research, but at the end of the day the only real test is to actually ask people for money for your product. Get to that point with the minimum of cost incurred, and you’ll be minimizing your risk as much as possible.
Bad Management
This can strike a business at any time, from inception to years into the business. Bad management will poison every other facet of the business, and sooner or later it will cause that business to fail. Bad management comes in many forms, it could be mishandling of valuable employees, personal use of business funds or even just poor management of stock levels.
Bad management will cost you customers and money, something no business can afford to lose. If you are the manager, know that you set the tone for the whole business and everyone relies on you to keep things working smoothly. If you’re hiring a manager, call their references. Far too often this crucial step is overlooked in the hiring process.