Four Reasons that Businesses Fail and How to Avoid Them
Fortunately, if you’re starting a new business, there is a lot that you can learn by considering the successes and failures of other businesses. In this post, we’ll review some of the most common reasons that businesses fail and offer tips on how your business can avoid the same fate.
1. Cash Flow Problems
Having enough cash flow is crucial for businesses in all industries. For your business to be successful, you need to ensure that you’re earning more cash coming than the amount that you’re spending. Although this might seem like an obvious concept, there are many ways that a new business can run into cash flow problems.
Some of the most common cash flow problems for new businesses include overestimating future sales, not pursuing past-due receivables, and failing to adjust your cash flow schedule for seasonal or cyclical changes. The best way to avoid these problems is by securing financing before making any purchases, following your budget, and planning as far in advance as you possibly can.
2. Failure to Keep Up with Market Demands
Brainstorming a new idea can be a great way to enter an untapped market. Unfortunately, though, a new idea can only take your business so far. There are plenty of examples of businesses that were “first to market,” but unable to adapt to market demands. For example, Netscape once held over 90 percent of the internet browsing market, but became essentially irrelevant in less than a five-year time span.
Regardless of your business’s industry, you should be conducting consistent research to see how you can better serve your customers. Then, bring them to fruition. Although market research, product development, and other investments may be expensive, they can often be well worth the cost. If you’re unable to afford adding new services or products to your repertoire, consider applying for a business loan so you can afford necessary updates.
3. Inability to Stand Out from Competition
New industries are generally the most fragmented and have the lowest barriers to entry. But as Harvard Business Review explains, “The Consolidation Curve” inevitably causes industries to have fewer competitors over time. In fact, even within the first few years of development, many industries have three of fewer businesses conducting 15 to 45 percent of all business.
There are numerous actions that you can take to make sure that your business remains ahead of competitors. For instance, viewing the market with a long-term perspective can be incredibly beneficial. Even though many infrastructure and marketing investments may not pay off for a few years, they can help distinguish your business from the competition and “survive” until the industry has matured.
4. Poor Planning
Running a successful business requires a significant amount of discipline. In the early stages of your business, it can be very tempting to take shortcuts. But eventually, taking these shortcuts will likely catch up to you. Instead, you should plan as much as possible so that you can keep your business’s future safe.
Without planning, your business can go from being financially viable to bankrupt in a very small amount of time. Doing things such as setting aside an emergency fund, having a lawyer on retainer, and investing in business insurance are all examples of actions that have short term costs and long-term benefits. Many of these efforts may cost significantly less than you would imagine. For example, the average small business insurance plan is only $1,281 per year (just over $100 per month).
Running a business in any industry can be incredibly difficult, but just because it’s challenging doesn’t mean it isn’t worth the effort. If you can recognize these common sources of business failure before they actually materialize, you’ll have a much better chance of competing and succeeding within your industry.
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