The failure rate for all U.S. based startups after five years was more than 50 percent. As you move the time frame higher, the failure rate moves at a positive correlation. While this statistic and many others like it is alarming to both existing and aspiring entrepreneurs and business owners, there are many ways to prevent it. By first identifying the most common culprits why businesses fail, one can adapt his/her business style and decisions to avoid them. Here are the top four reasons why businesses fail and how to avoid it:
Product Doesn’t Have a Market
A business whose product/service does not have a market, or does not have one that is big enough, is bound to fail. This is often a side effect of failing to do sufficient market research before starting a business. Sure, no one is stopping you from developing a business based on a product or service that is yet to be tested. But if you are looking to make money from your business venture, you need to first make sure you have an idea that someone else will pay for. Look at the latest trends and reports in the industry you are planning to enter. Compare statistics, growth, and projections. Conduct market surveys to help determine reasonable price points, target customer, and overall market demand.
Founder Goes on a Solo Mission
Business ideas can come from just one person, but to grow it requires a team, or at least a co-founder. Most businesses fail because the founder doesn’t have anyone else to delegate tasks to or brainstorm with to make better, more informed decisions. Having at least one other person working with you on your business lends another perspective on things. They also help share the load on day-to-day challenges, whether it’s finding your next investor for a cash infusion or talking with journalists and bloggers to promote your brand. That being said, don’t just pick whoever is available at the moment. Look for a co-founder who compliments your strengths and weaknesses and who possesses the same level of passion and interest for the industry or brand as you have.
Offer Nothing New to the Market
Your business must be able to differentiate itself from existing competitors in at least one noteworthy way. It could be lower prices versus competitors, a better ergonomic handle, or even just a longer life cycle than existing competition. Lacking any unique value propositions will kill your business slowly. Customers are less likely to jump ship from their current provider to your business if you don’t have anything new to offer. The solution? Dive deeper into the product or service and try to dissect what value you actually bring to the market. Take a gap year to gain new experiences and insights about what your industry or market lacks and try to fill it.
Inability to Manage Cash Flow
Proper cash flow management is perhaps the single most important step to keep your business alive and kicking. An idea with real potential may be the spark that ignites the whole business endeavor, but it’s your ability to manage cash flow that ensures your business’ survival. Inability to allocate your available cash into the right departments and tasks can hurt your business’ ability to scale. If finances are not your expertise, hire an accountant or chief financial adviser to help you balance your accounts and make precise financial projections. You can start practicing astute cash flow management by determining break even point, organizing all financial data on a cash flow worksheet, collecting receivables asap, and maintaining cash reserves in case of rainy days.
Majority of businesses fail because they lack planning and preparation. When things start to go south, they panic and drown. By acknowledging the top four reasons why businesses fail, you can better prepare for when you encounter one or more of these situations.
by: Dennis Hung