Although you might be extremely confident that your startup business will be a success, it’s important to know that nearly half of all new businesses fail within the first five years, according to Statistic Brain. There are a number of reasons why a startup business can fail. You can decrease the chances of your startup business failing if you know what those reasons are and what to do to avoid them. In this blog I outline the top four causes of startup business failure, according to Statistic Brain, and what you can do to avoid them.
- Incompetence –
According to Statistic Brain, the specific pitfalls associated with incompetence include emotional pricing, living too high for the business, non-payment of taxes, no knowledge of pricing, lack of planning, no knowledge of financing, and no experience in record-keeping. About 46% of new businesses fail within the first five years because of these reasons. To avoid making the mistake of emotional pricing or having no knowledge of pricing and lack of planning, it best to develop a business plan first.
A business plan should include industry and target market information. Accurate industry and target market information can be obtained from sites like IBISWorld and U.S. Census Bureau’s American FactFinder. The data you obtain from these two sites will help you choose the right pricing for your product or service and target the right audience. The key to avoiding these mistakes is knowing your target customer and understanding your industry. A business plan will also serve as a roadmap for how you will operate and grow the business. Better planning can minimize your chances of startup business failure.
In regards to living too high for the business, non-payment of taxes, no knowledge of financing, and no experience in record-keeping, the best way to avoid these mistakes is by living below your means, keeping a Legal Certified Public Accountant on your payroll, and utilizing tools such as a Google Apps for Work and a Customer Relationship Management system (CRM) such as Insightly.
Living below your means will be necessary when you own a startup business because you will have both business and personal expenses to cover. You will need to stretch every penny until you start getting results from the business. Keeping a Legal Certified Public Accountant on your payroll will help you budget properly and stay on top of your taxes. They can also direct you to someone who may be able to assist you with obtaining capital for your startup business (outside of your personal savings).
Tools like Google Apps for Work and Insightly will help you manage your day (i.e. tasks that need to be completed and appointments) and your customer information (i.e. contact information and sales). Consulting with experienced professionals like Legal CPA’s and using tools like Google Apps for Work will help you stay on top of your finances and improve your record keeping.
- Unbalanced Experience or Lack of Managerial Experience –
According to Statistic Brain, the specific pitfalls associated with unbalanced experience or lack of managerial experience include poor credit granting practices, expansion too rapid, and inadequate borrowing practices. About 30% of new businesses fail within the first five years because of these reasons. To avoid making the mistake of poor credit granting practices, I suggest vetting your customers before putting them on a payment plan. This means checking their credit history to determine their likelihood of paying you on time. I also suggest getting as much of your money upfront as possible.
In regards to rapid expansion, this is tough one. I suggest having an emergency plan for rapid expansion. Write down what you will need if the business grows fast and what resources you will use to fulfill those needs. Knowing what resources you will need (and making sure they are available when you need them) may make it easier for you to handle expanding rapidly. Resources may include people (i.e. employees or contractors), additional capital, inventory and/or supplies, etc.
To avoid inadequate borrowing practices it’s important to have a thorough understanding of the expenses associated with operating your startup business so you will know approximately how much working capital you need to sustain it. Understanding your working capital needs will enable you to borrow enough to cover your expenses.
- Lack of Experiences in Line of Goods or Services –
According to Statistic Brain, the specific pitfalls associated with lack of experiences in line of goods or services include carrying inadequate inventory, no knowledge of suppliers, and wasted advertising budget. About 11% of new businesses fail within the first five years because of these reasons. To avoid making these mistakes, I suggest better planning. Researching your industry and studying your competitors business models will give you a better idea of how much inventory to carry, who the best suppliers are and the most effective marketing techniques for your products or services.
- Neglect, fraud, disaster –
About 1% of new businesses fail within the first five years because of these reasons. To avoid making these mistakes, I suggest being as attentive as possible to your business. Most startup business owners work 12 to 14 hour work days in the beginning. It sounds like a lot but it’s necessary to stay on top of things until you can build a trustworthy team to assist you. Also, conducting background checks on potential business partners, employees, and/or contractors may help you avoid experiencing fraud.
The Bottom Line – No Startup Business is Guaranteed to Be Successful
The bottom line is, the success of your startup business is not guaranteed but there are things you can do to prolong its failure or sustain it on a long term basis. Implementing my suggestions will help. Ultimately, better planning will make for a startup a business that is more likely to be successful.
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