It’s a widely quoted statistic that eight out of ten business ventures close within the first 18 months. No one sets out in business with the idea of failure, but if you want to avoid becoming part of that statistic, it’s vital to know the most common reasons for a business to go under so that you can steer clear of making the same mistakes.
Especially in the early days, a new venture needs to have reserves to fall back on to ride out an unexpected storm. If you don’t have the resources to cope with an unpaid debt or other sudden expense, then your business could be living on borrowed time. Even if a bolt from the blue doesn’t cause outright failure, if you lack the means to cover it then the resulting cash flow problems can often be just as fatal, only over a slightly longer time span.
Do people really want what you’re offering? Are there enough potential customers to make the venture viable? It’s true that many game-changing businesses seemingly arrive out of the blue and create their own market, but these are the exceptions that prove the rule. The vast majority of successful operations find a workable niche and fill it well, rather than hoping the consumer landscape will change to meet them half way.
Finding a niche and generating healthy turnover is only part of the battle: if you can’t make enough profit on each sale, then no amount of volume will keep the business afloat. Do your suppliers enable you to sell at a comfortable profit? Can your margins cope with the necessary advertising costs? Unless you have wealthy backers, you’re unlikely to be able to operate at a loss for long, so profitability is vital from the start.
If you’re confident you can operate profitably, have you accounted for the presence of others in your field? Established businesses will usually have long-standing relationships with suppliers and customers, which not only makes it more difficult to break into a niche but also means they may have the leeway to compete aggressively. Can your margins withstand a price war, or are your profits on a knife edge?
You could have a genuinely world-beating product or service to offer, but if you can’t clearly communicate why this is the case, then the customers will probably not be lining up outside your door. Hiring professional marketing help may seem like a large expense to take on, but getting the word out about your company is vital if you want to enjoy success.
It can seem like success is guaranteed when you land a big contract, but this can also introduce a danger: being too reliant on a single large customer puts you at the mercy of another business, and this is not a good situation to be in. The same goes for only having a single supplier or being reliant on just one sales channel. Diversification is essential if you want to have the ability to withstand the inevitable loss of individual commercial relationships.
On the other hand, many companies make the mistake of diversifying too far and too fast, and losing sight of what their venture was originally about. Aim to fully develop your initial idea, making it a stable, ongoing success before allowing yourself to be sidetracked into tangentially related areas, however exciting they may seem.
Amid the excitement of launching a new venture, it probably won’t cross your mind to consider anything but success. However, if you don’t account for these common causes of failure from the outset, you increase the chances of falling victim to them sooner rather than later.
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