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Caution: 3 Main Reasons for Business Failures

By: Ian Varley

 

Caution Main Reasons for Business Failures
  • Running out of money
  • Lack of planning
  • Growing too fast

There are countless scare stories out there and it’s true, many businesses don’t make it in the long run, but according to the SBA, 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. 25% make it to 15 years or more. Interestingly, these numbers have not changed much over the past 20 years, even in times of economic downturn, so what are the main reasons a business fails?

Running Out of Money

According to a US Bank study a massive 82% of businesses fail due to a lack of cash flow. Understanding what this means can be difficult for non-accountants to grasp, but simply put, you may have made lots of sales and are making a profit, but you don’t have enough cash in the bank to pay your bills/ loans/ payroll/ taxes when they are due because you are waiting to get paid by your customers. Without money to pay your obligations you won’t be able to survive for long.

It is estimated that only 48% of small business has their funding needs met. 23% have a shortfall and another 29% may have unmet requirements. Obtaining financing for new start businesses can be difficult, particularly if the owner has poor credit and limited collateral to offer as security.

Lack of Planning

Pursuing your dream of becoming an interior designer because you enjoyed redecorating your bedroom may seem like a good idea, but you need to do detailed market research and a thorough evaluation of your competitors before you start your business. Is there a demand for your product or services or are there already too many competitors in your area? Put together a Business Plan. This is a very important step in launching your business. It will provide you with a guide for success and needs to cover areas such as what you are selling, a market analysis, sales and marketing strategy, financial plan and projections. A good business plan will not only help you stay on the right track, but will be essential if you are seeking funding.

Growing too Fast

This may seem counterintuitive. Surely the aim of every business is to grow? Over-expansion can kill a business depending on the reason. Will you have access to sufficient capital to fund the growth? Are you going gangbusters because you are selling your product too cheaply or to the wrong customers who won’t pay you? Do you have enough money to pay your suppliers? Do you have enough staff to help you manage the additional work? Can you pay them?

Running your own business can be one of the most rewarding things you will ever do and small business is the life blood of the US economy, with almost 90% of businesses having less than 20 employees. Forbes estimate that over 500,000 new businesses are formed each month.

What would the world be like if Walt Disney had given up when his first animation company went bankrupt? He was told he had no imagination or original ideas and was turned down hundreds of times when seeking financing for Disneyworld. Henry Ford had two automotive companies fail before finding success and Sir Richard Branson has formed over 400 companies under the Virgin brand. Do you remember Virgin Cola, Virgin Drinks, Virgin Clothing? Don’t let the fear of failure stop you but be mindful of what could harm your chances of success.

Published: October 1, 2019
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Ian Varley

Ian Varley is the CEO of Eagle Business Credit, an accounts receivable financing company that specializes in fostering growth for other small businesses. Ian is a thought leader in the small business finance community, promoting his ideas at EagleBusinessCredit.com. Connect with Ian on LinkedIn and follow @EagleBizCredit on Twitter and Instagram.

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