By: alfredolopez
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Why Do Most Businesses Fail? Here Are 3 Reasons

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“The road to success and the road to failure are almost exactly the same” -Colin R. Davis

Research from the Small Business Development Center at Bradley University and published in January of 2016 found that 25% of small businesses fail in the first year, and by year three, that number jumps to 44%. According to a chart at Statistic Brain, based on this research, 46% of the businesses that fail, fail due to incompetence. Incompetence is a broad category and can be broken down. Here are 3 Reasons Most Businesses Don’t Succeed.

Lack of Planning:

a. Failure to measure or create goals and objectives will cause a business to fail. A plan will identify what goals a business needs to meet and the strategies to utilize to meet those goals. Examples of specific goals for each month are; revenue objectives, profit objectives, numbers of new customers, specific marketing, and operational activities. 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.

b. There is not enough demand for the product or service at a price that will produce a profit for the company. This, for example, would include a start-up trying to compete against big box stores.

c. Out-of-control growth is a reason for failure. Moving into markets that are not as profitable, or borrowing too much money in an attempt to keep growth at a particular rate can cause a business to fail.

Inadequate Marketing:  

a. If a business fails to announce to prospective customers that it is open for business, and why they should want to deal with the new company, that company will flounder. Just because a company opens its doors for business, does not mean that customers will beat a path to its door.

b. A company that advertises to the wrong demographic will fail. In order to ensure that a business succeeds in the first few months, it has to implement marketing programs that get the attention of, and appeal to, the needs of its customers. Ads in newspapers, magazines, radio, television, and billboards reach a broad audience. Trade shows, seminars, and workshops target an audience already interested the basic type of product offered by a business.

c. A business needs a strategic online presence to survive. According to business.com, 77% of people take the time to read product reviews before they make any purchases online. The Social Media Today website states 71% of consumers are likely to purchase an item based on social media referrals. The website also observes that “It is quite unfortunate that many businesses and organizations dive into the social media bandwagon without a clear strategy. As a result, they end up disappointed.”

Mismanaging Capital: 

a. A company without a cash cushion will fail. A business needs a reserve fund for unexpected increases in the costs of things like utilities, materials, and labor. It needs enough reserve cash to carry it through tough times and seasonal slowdowns. Business is cyclical and bad things can and will happen over time, the loss of an important customer or critical employee, the arrival of a new competitor, even the filing of a lawsuit. These things can all stress the finances of a company. If that company is already out of cash and borrowing potential, it may not be able to recover.

b. Poor accounting will also lead a business to failure. With bad numbers or no numbers, a company is flying blind. It is a common and disastrous misconception that an outside accounting firm hired primarily to do the taxes will keep watch over the business.

c. If a business spends too much on start up costs, it will fail. Many entrepreneurs burn through their start-up capital before their cash flow is positive by investing too much in their location, equipment, property, and furnishings.

Starting a new business is an adventure, but an entrepreneur must step carefully to ensure he is on the road to success.

 

Do you qualify for a
small business loan?