Nine out of ten businesses fail before three years of age. That is why it is essential to know how to interpret the signals, adapt to the market, the needs of the target audience and take into account the reasons why businesses fail within few years of their creation. In this way we avoid falling into the same mistakes that others have already made. Here are the main reasons why businesses fail in their early years.
11 Reasons why businesses fail
1. Starting with the wrong reason
The truth is that many companies were created for the wrong reason . Let’s take an imaginary example that we could easily find in reality. An electrician who works for a construction company decides that he no longer wants to answer to anyone and that he could do better by working on his own.
Fine he wants to quit his job and become an entrepreneur, but this person may not have realized that although he has the skills to do a good job in the field of electricity, he however lacks the skills to run a successful business. Over time, your initial enthusiasm will diminish. In the end he will close down his company and return to work for the same or another entrepreneur.
Unlike the electrician, if we create a company for the right reasons we will have many more chances of success . For example, having found the product or service that society is demanding and that will make life easier for a certain sector of the population.
2. Not having the necessary capital
Creating a company without sufficient capital is one of the numerous reasons why businesses fail. Many owners of new businesses underestimate the dangers of cashflow. Before we start any business, we need to take into consideration the amount of time our customers will take before being able to pay us the bills. Companies usually need a year or two to reach their break-even point, in which case it is necessary to estimate the expenses until such time. But when we fail to plan these things, and the business isn’t pumping in the money as expected, some business owners may be forced to take on expensive loans just to survive and try to push the business forward.
We must take into account the amount of money that we will need to start a business. And think about the following three aspects:
- The initial investment required by the business. Here you will have to include opening costs of the premises, purchase of merchandise, bonds, licenses and procedures, expenses of incorporation of company, etc.
- The main current expenses that your business needs during the first year (or two). Rentals, salaries, electricity bills, telephone, water, insurance, etc.
- Interest generated by the obtained financing.
Related article: 18 sure-fire tips to become a successful entrepreneur
3. Wrong planning
Lack of planning is one of the most common reasons why businesses fail in their early years. On many occasions, we entrepreneurs are so focused on achieving our dream that we forget the importance of preparing a detailed Business Plan .
In it you should include questions such as the analysis of the competition, forecasts of income and expenses, budget and marketing strategy.
4. Lack of leadership and direction
Having sufficient leadership and leadership skills is critical to the success of any business. In fact, the lack of them can lead to confusion and conflict within the company, undermine the morale of workers and reduce productivity.
Like all skills, these can also be learned. Make sure you strengthen those areas which you know you have more weaknesses.
5. Uncontrolled expansion
Sometimes, a business die due to the owner’s extreme hunger for more success. And this is not something that happens on a few occasions, but rather more often than we imagine. It happens when the business results are much better than expected and then the owner prematurely decides to go for the expansion of the business without control.
To make sure this does not happen to you, decide to expand only after carefully reviewing each detail. Do you want to internationalize? Analyze the new market, study the consumers, the possible competitors that you will have, if the country/city has the specialized labor that you will need, what facilities you will need and what is the price, etc.
And do not rush. The slow but firm steps always win the race of the businesses.
6. Failures in advertising
Many companies fail because they do not advertise. This error is the consequence of a kind of mentality: “Good products sell themselves”. This is very far from reality. If nobody knows you, how will they come to you? You have to reach the consumer, you have to advertise your products.
7. Terrible customer service
As we already know, customers are the bane of any company, if inadequate attention is given, how do we expect them to return? The attention that should be given to these should be respectful, cordial and professional because only then will they be satisfied with the products and services we offer, and will want to return to our establishments and thus in that way, we will achieve their loyalty. You can check out Neil Patel’s guide on how to treat your customers
8. Inability to delegate
Many owners of new businesses make the mistake of wanting to do everything and avoid delegating activities to members of their team and this is precisely one of the reasons why businesses fail to survive. And there is the confusion of believing that nobody will do things better than oneself or that if you want something to be done, you have to take care of it yourself. The most common problem with this is that this attitude leads to extreme tiredness and even disappointment if things do not go as expected after a prolonged effort.
The solution: learn to delegate. Hire others , experts in your fields, while you focus on tasks that contribute to the growth of the company, such as preparing others for leadership positions.
9. Unprofitable business model
Just because you have a business idea that you’re excited about does not mean it’s a good idea. This is where it is important to have a good business plan and have done a thorough market research . Looking for external advice can also be a good idea.
It is good that you ask yourself questions like: Is there a customer base for this product or service? How long will it take to bring the business to market and at what cost?
10. Underestimating the competition
Even if you have a solid business model, a lot of funds to start with, the freedom and management skills necessary to succeed, you still have to overcome a huge challenge: competition.
To increase the probability of success, perform a market analysis with emphasis on the competition. Evaluate your strengths and weaknesses and learn from it, implement improvements to achieve a competitive advantage.
11. Mismanagement of finances
One of the many reasons why businesses fail is because they get too much debt beyond their financial capacity. Mismanagement refers to problems such as: the mix of the owners’ personal expenses with the company’s expenses, the lack of anti-fraud controls, the non-compliance of accounts receivable processes , amongst others.
Remember: one of the essential prerequisites for the success of any business is the correct handling of money, which not only consists of keeping accounts well, but also in the type of decisions that are made regarding the finances of your company.
Having listed the reasons why businesses fail, we hope you strive to avoid them inorder to create a profitable and long lasting business.
And If you found this article helpful, then we urge you to also check-out the 18 sure-tips to becoming a successful entrepreneur