Being an entrepreneur means going out of one’s comfort zone and taking calculated risks to start a business. While these risks are typically based on informed decisions, entrepreneurs sometimes take a leap of faith when entering new industries. In the end, these entrepreneurs reap the rewards of their actions.
But there are also instances when a business cannot survive its first year. Around 20 percent of businesses fail in their first year of operations. The number increases to 50 percent in the second year, and by the end of a decade, only 30 percent of small businesses continue to operate.
To increase the chances of survival, it is important to know the different reasons why businesses fail. These reasons range from lack of finances to poor management.
Financial Issues
One of the main reasons why a business fails is financial issues. In these instances, the business owner knows the exact amount the business needs to continue operating. Even as the business owner already knows the money it needs to cover all the business expenses, it might not have achieved the revenue needed to cover these expenses. Due to this, the business finds itself facing shortfalls in revenue and might find it challenging to recover.
But there are also instances when the business did not price its product or service properly. There are instances when a business owner prices its products and services lower than its competition. There are times when this strategy can entice customers and allows the business to succeed. But there are also cases when the low price does not give the business the profit it needs to cover the expenses of running the business. Due to this, the business will eventually close.
A business can end up applying for a hard cash loan from private financial institutions. It might be able to prop up its numbers to a certain degree so that it can adjust its pricing scheme. But it might also discourage new customers from buying its products. At this point, the business is caught between a rock and a hard place, so the business owner might end up closing the business to prevent more losses in the future.
Poor Planning
Another reason why some small businesses fail is due to poor planning. This normally happens when a business owner does not look into the market properly and focuses on making a detailed plan to open a business. A traditional business plan typically has an executive summary, description of the company, analysis of the market, structure of the company, product or service, marketing strategy, funding sources, and financial projections.
When the business owner does not plan the business properly, it might face serious challenges when it starts the business. One important aspect of the plan is the analysis of the market. This is particularly true if the business owner is new to the industry. Analyzing the market is not limited to the demand for a product or service. It also includes the potential competitors in the market and market trends.
The business owner should also work on the sales or marketing plan to connect with its target market. It should ensure the plan is well-thought-out and should have contingencies if something happens while implementing the plan. Additionally, the projections should be realistic and achievable so the business will have the chance of meeting its short-term and long-term goals.
Ineffective Management
Even if the business has a well-made plan, it will still fail if the business owner cannot manage the business properly. When the business is still starting, the business owner will have to take on managing the business. Being the only senior-level manager means that the business owner will have to make all the major decisions in the business.
In this instance, the business owner should have all the necessary skills to manage all the company employees. The business owner should also work on implementing all the plans of the company. Due to this, the business owner should have the experience needed to manage the company. Without experience, the risk of mismanagement is high.
To reduce this risk, the business owner can look for people who can help manage the business. Additionally, the business owner can also outsource functions that he is not confident in handling. For instance, the business owner can hire an independent accountant to work on the financial aspect of the business.
Making a business succeed is not an easy task. But if the business owner makes a detailed plan, works on the finances, and manages it properly, the business will have a higher chance of succeeding and thriving even with the challenges facing the market these days.
