Starting and running your own business is the quintessential American dream. It goes beyond that, though. People from all over the world come to this country because they know that here anything is possible. But, unfortunately, the reality for most people who try to start a business is that the American dream ends with an American nightmare. Experts can’t agree on exact numbers, but many believe that the failure rate for start-up businesses is between 30-50% within the first few years after opening their doors. You would think that these numbers would scare away would-be entrepreneurs. But thousands of businesses are started every day.
Why such a high business failure rate?
The answer to this question is not a simple one. Various factors can determine whether or not a business will make profits and strive or fail to generate revenue and wither away. Just as no single component can guarantee a business will be successful, there’s also not one factor that can kill a business either. It usually takes a combination of errors to cause a business to fail so quickly from its inception. Knowing why businesses fail can help new business owners know what not to do. By limiting mistakes, entrepreneurs will drastically increase their chances of survival past those critical first few years of operation.
Most Common Reasons Why Businesses Fail:
Lack of Adequate Planning
When it comes to starting a successful business, the adage holds true: “He who fails to plan plans to fail.” It’s amazing how many individuals attempt to create a business without any sort of focused planning. Even though they know that the odds are stacked heavily against them, they still go at business creation with an “I’m going to wing it” attitude and then are surprised when the business crashes and burns. But business planning must go beyond just the first month, even the first year. The Japanese are masters at business planning. They typically create business plans of up to 120 years out into the future. Now that’s a “big picture” mindset. People who want to create lasting businesses should make the effort of planning it out long before they start their operations.
Poor business location
Having an amazing business in the wrong location will still result in business failure. No matter how good your marketing efforts are or how talented your staff is, location is critical to its success for most businesses. You can have the best-tasting soup shop in the country, but your chances of success will be much higher in the right location than it would be in the wrong location. The location of the business is one of the most important and influential decisions a new business owner can make. It should not be done without much research and thought.
Most novice business owners severely underestimate the amount of capital needed to successfully start and run a business. As a result, businesses take a little bit of time to get situated and turn a profit. What happens is that many businesses run out of operating capital prematurely and are forced to close their doors. Since the business is new, getting the financial backing of a lending institution can be difficult, especially in the current state of the economy. People wanting to beat the odds should overestimate what they believe they will need in operating capital.
Poor marketing strategies
A business is destined to fail if it doesn’t do a good job attracting customers who need and can purchase its products and services. Too many individuals think that once the doors open for business, a flood of paying customers will find them. This idea is so very faulty. Businesses that succeed rarely do so because of luck. It takes savvy and hard-working business owners with a keen mind on marketing to creatively and affordably generate consistent new business. Fortunately, marketing techniques and strategies can be learned and implemented quickly. Those business owners that want their business to thrive long-term need to create marketing systems that will continue to attract new customers to their doors.
Low profit margins
The lower the margin of profitability a business has, the greater the likelihood that it will fail. If it takes $1 to produce $1.50 in revenue, the business is at severe risk of falling apart the first time trouble hits. Compare this situation to a business where each $1 is producing $10 in revenue. The latter business has much more room to deal with the financial hiccups that inevitably occur with new businesses. If you want a business that will be strong enough to survive the storms of the first few years of operation, make sure that you have large profit margins.
Although many businesses fail, this doesn’t mean that yours needs to. Knowing the most common pitfalls in failed business attempts will guide you through creating a business that can outlast the norms. Running a successful business can be the most exciting and rewarding experience that you can have. But it can also be a nightmare filled with stress and financial disappointment. Proper planning is the cornerstone of all strong businesses.
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