Seven Reasons Why Small Businesses Fail In Their First Year

By Randall Orser | Budget

Studies indicate that as many as eighty per cent of new businesses fail in their first year. The dream of self-employment turns into a nightmare for a surprising number of people. Understanding the reasons so many businesses fail can help you to avoid the pitfalls and prevent it happening to you.

There are many different reasons why people choose to start a business. Some are driven by the idea of turning a passion into a way of making a living. Others are forced into self-employment by a lack of job opportunities. Whatever the reason, the early months are a critical time. If you can survive these and build the foundations, your business has a strong chance of being around for years to come.

The following reasons explain the high statistics relating to new business failures.

1) Lack of planning.

Written plans with financial projections are great tools for keeping a new business on track. A plan should describe the products and services the business will offer and list milestones for the first year. Without a plan, you have nothing to measure performance against.

2) Lack of cash.

Without cash, even the most talented entrepreneur will fail. A new business will initially need cash for stock, materials and working capital. If customers don’t pay on time, there won’t be funds available to continue trading. Lack of cash is one of the main reasons businesses fail, and it’s one that’s easily avoided if you manage cashflow from day one.

3) No marketing activity.

A business won’t survive without customers. Marketing activity is essential to retain existing customers and to reach new ones. You can launch a business with promises of orders from people you already know, but this isn’t a long term strategy for growth. Having a website, engaging on social media and encouraging word of mouth advertising are simple marketing tactics for building a customer base.

4) Poor management.

Entrepreneurs aren’t always the best people for managing the detail of a business. As well as managing the financial aspects, a new business owner needs to build structure and processes. As a company grows, there may be people to manage and staff issues to deal with.

5) Reliance on one or two customers.

Building a business relying orders from one or two large customers can be very risky. Loyalty isn’t guaranteed, and a customer’s financial position could change. The constant threat of competitors stealing these key sources of income places great stress on a business.

6) Poor administration.

Administration is another weakness for many entrepreneurs. If order books, customer records and accounts aren’t kept in good order, you could end up with customer complaints and lost sales. In extreme cases, you could face legal action for failing to pay tax or comply with legal requirements.

7) Not understanding customer needs.

An entrepreneur needs passion and confidence to succeed, but he also has to understand what customers need. Creating a product that no one will buy is a path to ruin. Ideas should always be tested before you commit to build a company around them. It’s also important to recognize whether something is a short term trend or the basis of a long term business.

Launching a business can be a way to follow your passion in life and become financially independent. With no boss to report to, it can also mean flexible working hours and an improved lifestyle. However, a disciplined approach and a range of skills are required to get a new business through the challenges of the early months.

About the Author

Bookkeeper Extraordinaire Number Crunchers® Financial Services Learn how to just say stuff it to this bookkeeping thing with our 'Just Say: "Stuff It" To Bookkeeping program.