Is your company built to last beyond the first five years? Or are you, like 4 out of 5 new business owners, setting yourself up for failure?
You’ve probably heard this popular statistic: the survival rate of new businesses averages about 20% over a 5-year period. In other words, 80 out of each 100 businesses started this year will go out of business sometime during the next five years. Less well known is this fact: of the 80% percent that fail, more than 60% were profitable when they closed. How can that be? Here are ten reasons why profitable small businesses fail:
1. Poor Planning
A business can’t succeed without a plan. This is where you work out the crucial elements every business must have – finances, marketing, management, and both a short and long-term strategy. What’s your vision? How many employees will you need? What will the budget look like? Your business plan should answer these questions.
2. Going It Alone
You’re strongly motivated and ready to take on the world. That’s great, but don’t go it alone. To succeed, new business owners need advisors with experience and know-how. There will always be parts of the business you shouldn’t handle yourself.
3. Idle Mindset
There’s no template for what makes an entrepreneur successful, but certain character flaws crop up again and again when businesses fail. Without passion, commitment, a positive attitude, a strong work ethic and stamina, you might as well cut your losses now.
4. Competition
An entrepreneur who is foolish enough to underestimate or ignore competitors is destined for failure. Every business has competition. Entrepreneurs must stay abreast of marketplace changes and continually innovate.
5. Wrong Employees
Your business will never prosper if you hire employees who exhibit poor customer service skills or lack the willingness to work hard. Hiring good people is time-consuming, but critical to success. Take the time to do it right.
6. Ineffective Marketing
All marketing strategies should include measurable goals, such as increasing revenue by a certain percentage or generating a specific number of new customers. Although it's acceptable to miss goals on occasion, successful marketing must consistently meet or exceed designated goals.
7. Dysfunctional Management
Small businesses are more susceptible to the ripple effects of dysfunction. With a small staff, it can be easy to make allowances for people's tempers, bad moods or refusal to take responsibility. Sooner or later, though, these will take a toll on your business.
8. Operational Inefficiencies
Operational efficiency can mean the difference between survival and failure. Make sure every aspect of your operations is efficient – from scheduling to quality assurance to administration. Put in place a top-flight training program to teach employees how to deliver superior service that keeps clients satisfied and referring new business.
9. Lack of Cash
If we’ve learned anything from the recession, it’s that business is cyclical and bad things can and will happen — the loss of an important customer or critical employee, a new competitor, a lawsuit – these can stress the finances of a small business. If a company is already tight on cash, it might not be able to recover.
10. Poor Accounting
You cannot run a business with bad numbers. It is a common and disastrous misconception that an outside accounting firm, hired primarily to prepare taxes, will keep watch over your business. That’s your job as the chief financial officer.
Many of these pitfalls can be avoided if owners have a good understanding of their profit and loss and implement intelligent business systems that have built-in alarms. This way, when things start to go wrong, there’s plenty of time to react and redirect without becoming just another business statistic.
