Top 6 Reasons New Businesses Fail

By Michael Deane | October 29, 2010 AAA
Top 6 Reasons New Businesses Fail

It's often said that more than half of new businesses fail during the first year. According to the Small Business Association (SBA), this isn't necessarily true. The SBA states that only 30% of new businesses fail during the first two years of being open, 50% during the first five years and 66% during the first 10. The SBA goes on to state that only 25% make it to 15 years or more. Though the odds are better than the commonly held belief, there are still many businesses that are closing down every year in the United States. (To learn more, see Keeping A Small Business Afloat.)

The SBA estimates that over half a million businesses opened in 2009, while 660,000 closed. Out of those 552,600 businesses that started in 2009, we can expect about 165,000 will fail by 2011, and possibly more, given that the economy hasn't been booming in the past few years.

However, not all of these businesses need to fail. With the right planning, funding and flexibility, businesses have a better chance of succeeding. We'll go through some of the biggest mistakes that start-ups can make and figure out how to improve your chances of success.

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  1. Not Investigating the Market
    So you've always wanted to open a real estate agency, and you finally have the means to do so, but your desire to open the agency blinds you to the fact that we're in a down housing market and the area where you want to work is already saturated with agencies, making it very difficult to break in. This is a mistake that will cause you to fail from the beginning. You have to find an opening or unmet need within a market and then fill it rather than try and force your product or service in. It's a lot easier to satisfy a need rather than create one and convince people that they want to spend money on it.

  2. Business Plan Problems
    A solid and realistic business plan is the basis of a successful business. In the plan, you will outline realistic goals for your business, how your business can meet those goals and possible problems and solutions. The plan will figure out if there's a need for the business through research and surveys; it will figure out the costs and inputs needed for the business; and it will outline strategies and time lines that should be implemented and met.

    Once you have the plan, you must follow it. If you start doubling your spending or changing your strategies, you are asking for failure. Unless you have found that your BP is overwhelmingly inaccurate, stick with it. If it is inaccurate, it's best to find out what's wrong with it, fix it and follow a new plan rather than change how you do business based on quick observations. The more mistakes you make, the more expensive your business will become and the greater the chance of failure. (To learn more, see 4 Steps To Creating A Stellar Business Plan.)

  3. Too Little Financing
    If you have started a company and things aren't working out, you've got little capital and a struggling business; you're really not in a good position to ask for another loan. Be realistic at the beginning, and start with enough money that will last you to the point where you're business is up and running, and cash is actually flowing in. Trying to stretch your finances at the beginning may mean that your business never gets off the ground, and you'll still have a lot of cash to repay. (To learn more, check out How To Attract Investors For Your Small Business.)

  4. Bad Location, Internet Presence and Marketing
    A bad location is self-explanatory if your business relies on location for foot traffic. Just as dangerous, however, is internet presence. These days, your location on the internet and your social media presence can be just as important as your company's physical presence in a shopping district. Online presence will let people know that they can give you their business, so if the need is already there, the availability and visibility of your business is the next important step.

    This is similar to marketing. Not only must you make sure that marketing reaches people, it must reach the right people. So make sure the type of marketing lines up with the audience you want to reach. Big billboards may not be the way to go for an internet company, just as online ads may not be the way to go for a heavy-construction business. If the need is already established, make sure you're reaching the audience who needs your product or service.

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Rigidity

Once you've done the planning, established your business and gained a customer base, don't get complacent. The need that you're fulfilling may not always be there, monitor the market and know when you may need to alter your business plan. Being on top of key trends will allow you lots of time to adjust your strategy so that you can remain successful. One must only look at the music industry or Blockbuster video to know that successful industries can undergo huge changes.

Expanding Too Fast
Now that your business is established and successful, it's time to expand, but you must treat the expansion like you're starting all over again. If you're expanding the reach of your business, make sure that you understand the areas and markets into which you'll now be reaching. If you're expanding the scope and focus of your business, make sure you understand your new products, service and intended consumer as much as you do with your current successful business. When a business expands too fast and doesn't take the same care with research, strategy and planning, the financial drain of the failing business(es) can sink the whole enterprise.

The Bottom Line
Though the rate of business failure is around one-third, it doesn't mean that you have to fail. Through planning and flexibility you can avoid many of the pitfalls of a new business and be a part of the 25% that make it to 15 years. (For more tips, see Starting A Small Business In Tough Economic Times.)

For the latest financial news, see Water Cooler Finance: Ghosts Of Economies Past.

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