Depending on which report you read or whom you choose to listen to, somewhere between seven and nine businesses fail within the first few years. In other words, your chances of being successful simply aren’t that great. But if you take the time to understand the common culprits of failure, you may stand a better chance of survival.
Here’s Why Your Small Biz May Fail
It’s a sobering thought to consider that your business – the venture that you pour all of your time, energy, and money into for months or years – could flop before it ever reaches maturity, but that’s just the reality of entrepreneurship in a competitive marketplace. Most small businesses and startups fail in the early stages of growth and development, and you face the same challenges as the next guy or gal.
The good news is that your business won’t fizzle out without warning. By understanding the common culprits of early-stage small business failure, you can know what to look for so that you can (hopefully) avoid and correct any problems.
So, without further ado, here are the top reasons why small businesses flop before they ever get a chance to fly:
- Lack of Market Research
If you’re going to launch and grow a business, you need to know everything there is to know about the industry. Speak with the founder of almost any early-stage business failure, and they’ll tell you that they lacked important knowledge that they should have possessed.
Most founding teams do a decent job of attempting to understand who their target audience is, but you can’t stop here. You need to have an intimate understanding of who your competition is. Are there other businesses in your niche? What sets them apart? Who are their target customers? Is there enough room for both of you?
There’s some information you can’t know, but do your best to glean whatever insights you can from what’s available. The rest can be inferred and taken with a grain of salt.
- Poor Cash Flow Management
Business is all about money, so it makes sense that 82 percent of failed small businesses experience cash flow problems before crashing and burning. These problems typically involve poor budgeting, running out of cash, improperly distributing funds, and bad debt management.
The only way to get better at managing cash flow is to do your homework and implement sound financial principles that reduce risk and give your business a stable foundation upon which future growth can occur. Check out Revenued for some good insights and advice on how to avoid running out of cash, calculate cash flow, develop a cash flow statement, and forecast future cash flow.
- Premature Scaling
Every fledgling startup has goals of scaling up into a bigger business with more customers, more sales, and fatter profits. In fact, scaling is one of the primary objectives at this early stage.
“Scaling is a good thing, as long as it’s done right. Scaling is the result of a startup’s growth,” entrepreneur Neil Patel writes. “Too often, however, scaling is intended to drive a startup’s growth. That’s where we have a problem. That is premature scaling.”
By one report, premature scaling is the number one definable cause of startup death. It occurs in 70 percent of companies and is responsible for 74 percent of tech startup deaths.
The telltale sign of premature scaling is excess – too much money, too many early adopters, unreasonable debt, and far too many employees. The key to avoiding this problem is to focus on growing everything in sync. It won’t always work out perfectly, but growing each aspect of your business in relation to the other will prevent your operations and goals from becoming misaligned.
Get Ahead of the Curve
There’s nothing you can do to guarantee your business will be successful, but there are plenty of actionable steps you can take to ensure you have a better chance of thriving.
By understanding the common culprits of failure and developing a plan for avoiding or overcoming them, your business will have a major leg up on the competition.
Are you willing to put in the initial legwork so that you can reap the rewards in the future?
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