Many people say that new businesses fail in the first year. The U.S. Bureau of Labor Statistics says that this isn’t always true. BLS data shows that 20% of businesses fail within the first two years. 45% of them fail in the first five, and 65% of them during the initial 10 years. Only 25 percent of new businesses survive 15 years. The statistics haven’t really changed over the years. They have been pretty consistent since 1990.
Why Businesses Fail
1. Do not investigate the market
You’ve always wanted a real-estate agency and now you have the money to do it. However, your eagerness to start the business blinds you to other factors, such as the housing market being down and the saturation of agencies in the area you wish to work. This will lead to failure right from the beginning. It is better to fill an unmet need or find an opening in a market than to try and force your product or service into it. It is much easier to fill a need than it is to create one and convince others that they should buy your product or service.
2. Business Plan Problems
A realistic and solid business plan is essential to a successful company. You will describe your goals and how you can achieve them, as well as possible obstacles and solutions. It will determine if the business is needed through surveys and research, it will calculate the costs and inputs required for the company and outline the strategies and deadlines to be met.
You should stick to your plan once you’ve made it. You will fail if you double your budget or change your strategy haphazardly. Stick to your plan unless you’ve found it to be wildly inaccurate. It’s better to fix the plan if it’s inaccurate than to change your business model based on a few observations.
Your business will cost more and be more likely to fail if you continue making mistakes. If market conditions drastically change and negatively impact the chances of your business plan’s success, you may be asked to pivot. You would then revisit your original plan and make any necessary changes based on this pivot.
3. Financed Too Little
You shouldn’t ask for a second loan if you are struggling with your business and have limited capital. You can start your business with enough cash to last until you have a successful company and the money starts flowing.
If you try to stretch your budget at the start, your business may never get off the ground and you will still be left with a large amount of money to repay. This phase is the most important, but you can still use a lean management strategy afterward. Consider multiple funding and financing channels. Be creative and educate yourself about alternative sources of funding.
4. Poor Location, Marketing, and Internet Presence
If your business depends on foot traffic, a bad location will be obvious. A poor Internet presence is just as harmful. Your company’s location and social media presence can be as important today as its physical location within a shopping center. A strong online presence can help people to know you are available and that your business is visible.
Marketing is similar. Marketing must not only reach people, it must also reach them correctly. Make sure that the marketing you use is appropriate for the audience. It may not make sense to use large billboards for an online company or to run online ads for a construction business. Make sure that you reach the people who need your product or service if the need has already been established.
5. Staying rigid
Don’t get complacent once you have done your planning, set up your business and acquired a clientele. You may not be fulfilling a need. Monitor the market to know when it’s time to change your business plan. You will have plenty of time to change your strategy if you are aware of the key trends. You only have to look at the Blockbuster Video or music industries to see how successful industries can change dramatically.
6. Expansion Too Fast
It’s time for your business to grow, but it must be treated as if you were starting from scratch. When you are expanding your business reach, you should make sure you know the new markets and areas you will be reaching. If you are expanding your business’ scope, you should understand the new products, services, and target consumers as well as your existing successful business.
If a company expands too quickly and does not take the same care in terms of research, strategy and planning, it can cause the entire enterprise to fail.
The Bottom Line
Even though the failure rate for new businesses is about 20% in their first two years, this doesn’t necessarily mean you will fail. You can avoid the common pitfalls that new businesses face by doing research, planning and being flexible.