12 Reasons Why New Businesses Fail

 

12 Reasons Why New Businesses Fail

According to Dun & Bradstreet and INC. magazine, 33% of all new businesses fail within the first six months. Fifty percent of new businesses fail within their first two years of operation and 75% fail within the first three years.

Here are the leading reasons of business failures.

1. No Business Plan

You‘ve heard the old saying “If you don’t know where you are going, how will you get there?”

Too many business owners start their business without a plan. They simply “open their doors” for business and then expect to succeed.

Before starting your business, take the time to develop a Business Plan.

Your plan will identify what you want your business to accomplish (where you want to go) and the strategies that you will utilize (how you will get there).

(For tips on how to how to write a Business Plan, see the article entitled “How to Write an Effective Business Plan” in this section)

2. Under Funded

Many businesses fail within the first few months, because the owner runs out of money.

When starting any business, you will need money for all of your start up costs as well as money to sustain the business for the first few months of operation (until cash flow from operations is positive).

Running out of money is a result of poor planning. A properly developed Business Plan will tell you exactly how much money you require for start up expenditures and to operate the business until cash flow is positive.

A business owner should develop Income Statements and Cash Flow Statements for the first two years of operations. That will tell you whether or not you have sufficient funds to sustain the business until it is profitable.

3. Lack of Operating Goals and Objectives

Many business owners create a Business Plan to obtain a loan. Once they receive their funding, they put their plan “on the shelf” and do nothing further with it.

While it is important to have a Business Plan, it is also very important to have specific goals and objectives for the first twelve months of operations.

In your planning process, create goals and objectives for your business. Break down goals and objectives by quarter – in other words, identify all of the things that must be done during the first quarter, the second quarter, the third quarter and the fourth.

Examples of specific goals could be for each month; revenue objectives, profit objectives, numbers of new customers, specific marketing and operational activities, etc.

4. Failure to Measure Goals and Objectives

All too often, once a business starts operating, the owner becomes too immersed in the ongoing daily activities to take the necessary time to assess the progress of the business.

It is fine to establish operational goals and objectives, but you also have to measure how well your business is performing against those goals and objectives.

Measuring against the identified goals and objectives will tell the owner whether or not modifications and alternate strategies are required.

5. Failure to Pay Attention to Cash Flow

There is an old saying in business “Cash is King”. In the early months of your new business, monitoring cash flow is extremely important.

It is really as simple as this: if you continue to spend more money than you bring in, you will soon be out of business.

Cash flow is all of the money that you take in each month minus all of your expenditures.

Cash inflow is cash sales and accounts receivables collected.

Cash outflow is all monies paid for inventory purchases and operating expenses (rent, heat, hydro, salaries, marketing expenditures, etc.).

It is not uncommon for most businesses to have a negative cash flow for the first several months of operation (in some businesses this may be for more than a year).

However, at a point in time, the cash from revenues will exceed expenditures and the business will be in a positive cash flow position. Every new business owner has to ensure that he / she has preserved enough cash to reach this point.

6. Failure to Understand the Industry and the Target Customer

Some business owners start their businesses before fully investigating the industry.

What are the trends in your industry – is it growing or declining? What are the opportunities and what are the threats? Where can you position your business in this industry in order that your business will succeed? Will new technologies have an impact on your industry?

If you have not taken the time to understand your industry, you could be entering a “sunset industry”.

I have worked with two companies that had to reinvent themselves because they were both in “sunset industries” due to changes in technology. One was a manufacturer of computer printer ribbons for dot matrix printers. This was a very good industry until the introduction of laser and ink jet printers. People stopped buying dot matrix printers and the demand for printer ribbons declined significantly. The other company was a cheque printing company. Due to electronic payments, the usage of cheques declined significantly.

Some business owners open their doors for business without taking the time to understand their target customers (buyer demographics and psychographics, how they buy, what they buy, when they buy, what motivates them to buy and where they buy).

Do not expect that just because you are now in business, that customers will flock to your door. If you do not understand your target customer, how do expect to effectively reach them?

7. No Means of Differentiation – Just Another “Me Too” Business

Many businesses have failed because they are just another “me too” business.

Customers need a reason to come to, or to want to do business with your company.

If your products or services are the same quality and prices as your competitor(s), why will people buy from you? They already have an existing supplier.

If however, you can offer a different or better product / service (better quality, lower prices, broader selection, faster delivery, better location, extended warranty, etc.), prospective customers will want to do business with your company.

Every business owner must objectively ask this question “If I were a customer, why would I want to do business with this (my) company?” If you cannot identify two good reasons, then rethink your positioning and your strategies.

8. Poor or No Marketing Programs in Which to Attract New Customers

Just because you have opened your doors for business, that does not mean that customers will beat a path to it.

You have to announce to prospective customers that (a) you are open for business and (b) why they should want to deal with you.

By understanding the demographics and psychographics of your target customers, you can identify how to best reach them.

There are numerous ways in which you can market your business. Some of the more common are:

Advertisements (newspapers, magazines, radio, television, yellow pages, value packs); billboards; brochures (electronic and printed); cross marketing / cross promotions; direct mail; fax (broadcast or personalized); networking; newsletters; postcards; posters; promotional items; public speaking; referrals; sales calls (cold calls, scheduled calls); sales letters; seminars & workshops; signs (interior and exterior); targeted e-mail; telemarketing; telephone on hold messages; trade shows; website.

In order to ensure that your business succeeds, in the first few months you will have to implement marketing programs that get the attention of, and appeal to the needs of your target customers.

9. Underestimating the Competition

Some business owners underestimate the reaction of the competition when they start their businesses.

Any owner of an existing business that perceives that a new entrant to the industry will be taking away some of their customers, will aggressively take steps to defend their customer base.

They could do this by lowering prices, offering package / bundle pricing, extending terms, introducing new products, improving product quality, extending warranties, increasing marketing activities, etc.

Do no underestimate the competitive reactions to the start of your business. You may find yourself in an extended competitive “war”.

10. Not Cost Competitive

Before starting your business, attempt to obtain information about and to understand the cost structure(s) and selling prices of your competitors.

You may find that your competitors have lower operating costs than you. Your overhead may be too high. Your manufacturing processes may not be as efficient.

If your selling prices are the same as your competitors and their operating costs are lower, their margins will be higher. If that is the case and you get into a protracted price war with a competitor, you will not survive.

You will have to find ways to reduce the cost disparity if you plan to last in this industry. The lowest cost producer will always win a price war.

11. Lack of Attention to Accounts Receivables and Inventory

Some businesses owners do not pay attention to their receivables and their inventories. Accounts receivable and inventory can suck cash from a business.

If customers are not paying you, or are not paying you on time, they are using your money.

If you have excess inventory or slow moving or obsolete inventory, you have your money tied up in products that are of little or no use to your business.

Just as you should be monitoring the cash in the bank, you should also be carefully watching accounts receivables and inventory levels.

12. Poor People Management Skills

Many companies state that their employees are their most important asset.

Frequently customers do business with an organization because they like the people that they deal with in that company.

If you do not treat your people fairly and with respect, you may have a constant turnover of employees.

After a while, due to constant turnover, customers may become wary about dealing with your company.

If your business requires employees with unique skill sets, it may become difficult to find acceptable replacements. If that is the case, quality and output may suffer leading to customer dissatisfaction and a decline in your business.

Treat your employees well and they will enthusiastically help to grow your business.

Author:.

Mike Pendrith is the CEO of PerformancePoint Corporation in Toronto, Canada. He works as an advisor to owners of mid-sized and small businesses. Mike develops business plans for both start up organizations and existing businesses seeking funding for expansion purposes. Mike also works with senior managers in developing and implementing strategic plans in order to grow their businesses. For additional information, visit the websites at www.torontobusinesspl...

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Have a question for Mike?

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Jane Alford
28th May 2014 9:57am
I started a small Beach Boutique about a year ago. Things are going well. We have the opportunity to move to a much better location, with less rent but also less space. It is only a few blocks away but it is less that one block from the beach on the main street through town. I just dont know if its a good idea to move a new business this soon.
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Mike Pendrith
3rd June 2014 8:22am
Start by examining your customer base. Are most of your customers one time customers or are they repeat customers? Repeat customers will follow you - assuming they like your product selection and prices. If most of your customers are one time customers, being closer to the beach should be a benefit. Next, take a look at your potential new neighbors. Do the surrounding stores fit with your image? Will potential customers be driven away from this area because of any undesirable businesses, or ... Read More

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Hector Makhubele
11th June 2014 3:56am
How many business goals should an organisation have? Table

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kat gonzalez
23rd July 2014 4:58pm
What percentage of a restaurant's revenue can be generated by outdoor signage? I know outdoor signage can attract drive by customers, pedestrians, etc, but I am looking for some sort of percentage to effectively argue my case for better signage to the forces that be. thank you

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kingly
3rd September 2014 3:53pm
Sir! I want to go into the business of buying and selling of phone and computer accessories here in Lagos Nigeria.kindly help me sir with thw right business tips that can make me break through in this market so as to break in the competitive market.
Best regards!

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aayat khan
24th September 2014 11:56am
My company face loss and my supervisor warns me that if don't make profit within three months than I will be fired,my labour union is asking for bonus and I can't hire new employees! What can I do?
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Mike Pendrith
24th October 2014 11:20am
Aayat: It is difficult to provide you with a definitive answer without knowing all of the facts of the situation. It sounds as if the short term cure is to generate more sales. Are there other markets for your company's products / services - either vertical markets or geographical markets? Given that you have only 3 months, that would be the quickest fix.

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Nsubuga Henry
6th October 2014 5:43am
The tips are good. Are the remedies more practical than theoretical?

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Kizzy Wizzy
14th October 2014 5:14am
It is very good article,..I love it.

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Chibuzo
15th November 2014 11:13pm
I am looking into a business with negative cash flow for three years. Can I turn things around with my 13 years business experience, new vision and hard work. Please, is it too big financial risk to take. I have not made any commitment to buy.
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Mike Pendrith
26th May 2015 1:38pm
First of all, let me apologize for taking so long to get back to you. I was not looking in the correct place for these comments.

It is difficult for me to answer this question without knowing how bad (negative) the cash flow is. If it is minor, then yes, you may be able to turn it around. If the cash flows are large, be vary wary. You will need to do some further investigation as to why the cash flow is negative.

Hope this helps. Good luck

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Alyssa's Garden Boutique
10th December 2014 2:35pm
Hi. I first off wanted to say thanks and I agree with what you said. I'm a MBA student and have heard many of these things, but it's great to be reminded. I have an online business catered to baby & toddler girls and have been tinkering with the idea of opening up a storefront as well. Of course, this makes me nervous and excited at the same time. My question is, do you think it's best to account for inventory cost when you purchase it or when it sells and what do people usually ... Read More
Admin:
Website link removed

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UNcle Dave
4th January 2015 8:02pm
What would be more usefull is how do you start the planning process. We've all hear this for years... HOW do you fix it? I am trying to start from Zero. Now What?
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GT
4th January 2015 11:02pm
Hello, Dave:

Mike explains where to start with each of the examples he has given in this article.

Ultimately, the place to start is with an effective business plan. Read Mike's article, How to Write an Effective Business Plan, for more info: http://www.evancarmichael.com/Starting-A-Business/866/HOW-TO-WRITE-AN-EFFECTIVE-BUSINESS-PLAN.html

GT :)

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Lester Ewing
11th April 2015 10:10pm
I just opened a small women's boutique in a mall like flea market. I started easter weekend and now in my second weekend it's been really slow. I'm now worrying myself to death because the customers aren't buying like I expected. I think I need to give it time because I can't expect to out sell everyone in my second week. What do you think? How long should I wait before I start to panic? Because I really want this to work.
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Mike Pendrith
26th May 2015 1:55pm
Lester: I apologize for taking so long to get back to you. As it has been a few weeks, hopefully your business is now doing better. However, if things are still slow, possibly the patrons of the flea market are just not the right customers for your products. Consider another flea market or mall in a different section of the city / town. Think carefully about your target customer. Where do they shop? Go to the places where they will be. If you are still in the same flea market and are still ... Read More

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neema
15th April 2015 8:57am
firms that fail to innovate will die. what does this statement mean in the content of new venture
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Mike Pendrith
26th May 2015 2:06pm
Neema: My apologies for not getting back to you sooner. "Firms that fail to innovate will die". This applies to existing businesses and not new ventures. However, if you want to ensure that your new business succeeds, try to offer an innovative product or service, or do something different than the competition. If you are just another "me too" business, why will people buy from you? They already have a source of supply. If however you can provide them with something that ... Read More

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Maryann
23rd May 2015 2:22am
I am an Education Agent. I started my business three months ago. I have not gotten a client yet. I did some online research, so I know that my services are still relevant. Why am I not getting clients yet?
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Mike Pendrith
26th May 2015 1:35pm
Maryann: Sometimes it just takes time for word of your services to get out. Let me suggest a couple of things: Join a couple of network groups. Members of the group will then be aware of your services and may provide referrals. Join an association that is relevant to your area of expertise. Again this may lead to referrals. Offer to give free workshops / speeches through your local library, Chamber of Commerce, Board of Trade. Interested parties will then see you at these events and then ... Read More

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Mike Pendrith
26th May 2015 1:45pm
Alyssa: First of all, my apologies for taking so long to get back to you. I just realized that there were additional comments in this section. The simple answer to your question is that standard accounting practices are to account for inventory when it is received. If you do not do that then you do not know how much money you have tied up in your inventory. As I am sure you realize, inventory is an asset and must be shown on the Balance Sheet. One more comment. Online is a good business model ... Read More

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Dana
19th July 2015 8:48pm
When you plan for a business do you think first of the need or the profit?
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Mike Pendrith
4th August 2015 3:35pm
Dana: You asked whether when planning a business if you think first of the need or of the profit.

Always address the need first. Look for opportunities where current products or services are not fully meeting the market needs. Then think of ways in which your product or service will be superior to the competition. Once you are able to provide that product / service and the market learns about your company, the profits will automatically follow.

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len
1st August 2015 5:03am
i am an owner of a local manpower agency and its been in operations in 5 mos, but are the common failures that i have to expect..? i have clients..but clients decisions takes time to materialize..can i consider that a failure? and what do i need to expect in a business like manpower agency,we are services in nature..and what do i need to justify interms of operations ? i have partners in the business. is it right that to make them realize that this type of business needs a lot of patience and ... Read More

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Mike Pendrith
4th August 2015 3:45pm
Ien: You have been in operation for only 5 months. As a start up business, you and your partners have to recognize that it takes time to attract and develop clients. Be patient. One of the key things during this period is to watch your cash flow - you do not want to run out of cash. If you do, you will have to close the business. Carefully watch all of your expenses. You will have to spend on marketing. You and your partners must be patient. If there is a need for your services and if your ... Read More

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ali
17th August 2015 9:48am
I started pharmacy near a hospital,things were very positive in early 6 months.then more new pharmacie start operations ahead to me.there location is quite good than me.i got sale drop on deep level.please adcise how to compete and how can increase saleseven their location is far good from me.
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Mike Pendrith
17th August 2015 11:47am
Ali: If I understand the issue, this new pharmacy has a better location than you. As a result, sales have been declining. You need to think of ways to bring customers back to your store. Try having weekly specials on a few products. Advertise those specials in a local flyer. When customers are in for the specials, they may buy other products as well. Also, examine the demographics of your neighborhood. Are there certain products that you can offer which are unique to that demographic? That ... Read More

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Rajendra rana
20th September 2015 4:03am
hello sir
greetings

I want to start tea business for middle scale industry the climatic condition for tea cultivation is good as well.What sould i do before starting tea business?
shall i start from small tea selling business or middle scale industry?
if you have time and can give me some ideas about tea business plan rajendra
Admin:
[Email address removed by site admin. Please correspond here, or via the author's website]

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Mike Pendrith
21st September 2015 6:45pm
Rajendra:

Can you tell me more about what you have in mind?

When you say a tea business - is this a retail outlet that serves tea? Is this a wholesale business that sells tea to retailers? Or are you planning on growing and mixing / cultivating tea?

That would enable me to better understand what you plan to do.

Thanks

Mike Pendrith

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Mike Zakalia
8th October 2015 2:44am
"How to Write an Effective Business Plan in this section"?
Admin:
Note from site admin: Read Mike's article, link found on his author summary page. Here is the direct link: http://www.evancarmichael.com/Starting-A-Business/866/HOW-TO-WRITE-AN-EFFECTIVE-BUSINESS-PLAN.html

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mukisa
14th October 2015 2:14am
sir help us we are three people at makerere university uganda, we want to start aproject of making pillows according to the art knowledge but now this project requires money to purchase materials but now we want serious advise on how to begine this business by the planning and howcl to go through this market thanx

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Mike Pendrith
14th October 2015 12:43pm
Mukisa: You need to create a Business Plan and then present it to investors for equity financing and / or a bank for a loan. Read the article "How to Write an Effective Business Plan". Before you write your Plan, identify your target market (size, demographics), decide how you will position your product, describe how your product will be different from the competition, your channel(s) of distribution and what reasonable sales expectations will be for the first 2 years. Make sure you ... Read More

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Rey
22nd January 2016 5:44am
Nice article Mike, thank you for sharing :)

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A.R.LAKSHMANEN
22nd May 2016 11:48am
Mainly Business failures due to New Field focus (Lack of Experience) with out root experience we may not success.At least minimum 10 years of experience in necessary

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A.R.LAKSHMANEN
22nd May 2016 11:49am
No mentor (business guide) in difficult situation

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A.R.LAKSHMANEN
22nd May 2016 11:51am
1) Weakness in Sex and Drinks
2) Loose Talks with Friends.
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Mike Pendrith
23rd May 2016 12:02pm
Mr. Lakshmanen:

Thank you for reading my articles and sharing your thoughts and ideas.

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