Understanding why 82% of small businesses fail within their first year is crucial for steering your small business toward success. This blog explores the common pitfalls and provides practical strategies to ensure your business stays on the right track from the start.
Hey there, new business owner! How you doin’?
Jumping into your own venture must be exhilarating, but then you come across information like this while surfing the World Wide Web:
“A study performed by Jessie Hagen of U.S. Bank states 82 percent of businesses fail because of poor cash flow management.”
“On average, about two-thirds of small businesses survive the first two years, half survive five years, and one in three ten years, according to the latest data from the U.S. Bureau of Labor Statistics (BLS).”
These statistics about business failures are obviously intimidating and can scare the living daylights out of you, especially if you’re starting a business for the first time. Needless to say, the thrill of starting something new is often shadowed by the risk involved.
But instead of letting these stats get the best of you, let’s tackle this head-on. Why do so many small businesses fail so quickly? More importantly, how can you make sure yours isn’t one of them?
This isn’t about scaring you—it’s about preparing you. From cash flow problems to marketing mishaps, we’ll cover the big, most common mistakes to avoid and give you straightforward strategies to keep your business thriving past that critical first year.
Ready to find out how you can be in the successful 18%?
Let’s dive in and turn those odds in your favor. Here are the three main reasons why businesses fail, paired with effective ways to navigate these challenges.
Challenge No. 1: Cashflow issues
Imagine you’re running a small web design consultancy. You’ve just wrapped up several projects, and your clients are happy, but there’s a catch—most of them will take 30 to 60 days to pay their invoices. Now, it’s time to pay your team and cover monthly expenses, but the bank account is alarmingly low.
Let’s be real—did you start your business to chase down payments, or to create stunning websites?
This timing mismatch between earning revenue and receiving it can place your business in a tight spot. According to a U.S. Bank study, this scenario—poor cash flow management—accounts for 82% of business failures.
Cash flow isn’t just about the money coming in; it’s also about when it arrives and how you manage it. Many new business owners find themselves facing cash shortages despite having strong sales because their cash is tied up in unpaid invoices or unsold inventory. This mismanagement can mean not having enough on hand to cover essential expenses like payroll, rent, or new stock orders.
It’s a precarious position to be in because even a successful market fit can collapse under the weight of cash flow mismanagement.
How to navigate this challenge:
Here’s how to handle this delicate balancing act:
Tighten expense controls with lean budgeting:
Keep a close eye on outflows. Consider which expenses are vital and which can be delayed without impacting your operation. Prioritize necessary expenses.
Ask yourself budgeting questions like the following and more:
- Are there underutilized services or subscriptions that could be paused or canceled to reduce monthly outflows?
- Is it possible to streamline operations or reduce overhead costs without compromising service quality or employee morale?
- Can non-essential travel and entertainment expenses be minimized to improve your financial runway
- Are there opportunities to renegotiate rent or utility expenses to better align with your current financial situation?
Enhance receivables management:
Speed up your cash inflow by tightening up your invoicing terms. Perhaps offer a discount for early payments to encourage clients to pay sooner.
Explore diverse financing options:
Cash flow problems sometimes require creative financing solutions. Consider options like lines of credit, invoice factoring, or even short-term loans that fit your business needs.
Conduct regular financial reviews:
Make reviewing your financial health a regular part of your business routine. With CoCountant, you can take advantage of our 30-day free trial — where we’ll perform a comprehensive financial diagnostic and help identify areas for improvement, allowing you to plan better and manage cash flow proactively.
Hire a certified accountant:
Sounds impossible, considering you’re a new small business and can’t afford to hire a full-time accountant? Well, CoCountant lets you hire a dedicated accountant for a small, fixed monthly price, so every item listed here can be checked off by a professional.
Challenge No. 2: Lack of market research
Imagine launching a business based on your calling: you’ve started a boutique specializing in gourmet pet food, driven by your passion for providing high-quality, healthy options for pet owners who want the best for their furry friends. You’re excited, you know your stuff, and you’re ready to share it with the world.
Initially, enthusiasm is high. customers are interested, and your marketing efforts are well-received. However, as the months go by, a challenging reality begins to set in.
Despite initial interest, repeat purchases remain low, and customer foot traffic starts to dwindle. Your shelves are stocked with premium products, but the sales just aren’t keeping pace. Slowly, it becomes evident that while your marketing is catching eyes, the demand for high-end pet food isn’t as robust as anticipated in your local area.
This scenario is not uncommon— 40% of small businesses fail because there isn’t enough demand for what they’re selling. No matter how groundbreaking your marketing might be, if the broader market doesn’t need or want your gourmet pet food as regularly as needed to sustain the business, the sales won’t materialize.
What leads to this gradual but harsh realization?
Initial excitement from a niche community might give a misleading impression of broader market demand. However, signs like infrequent repeat customers, high levels of unsold inventory, and feedback from patrons suggest that while people love the idea, fewer are willing to pay a premium for gourmet pet food on a regular basis.
Why does this oversight occur so often?
Many entrepreneurs are so engrossed in their passions or past experiences that they neglect to verify if there’s a viable market for their product or service before diving in. Skipping thorough market research and failing to critically evaluate competitors are common missteps that precede business challenges.
Knowing there’s a demand for what you’re planning to sell, and understanding that this demand will sustain or grow, are crucial for your business’s survival and growth.
How to navigate this challenge:
Product/service description:
Begin with a clear, compelling description of what you’re offering. Focus on the benefits it brings to customers, rather than just its features.
Market positioning:
Identify what your product or service does better than anyone else’s. What’s your competitive edge? Pinpointing your unique selling proposition is crucial to distinguish yourself in the marketplace.
Lifecycle and legalities:
Discuss your product’s lifecycle, including any relevant intellectual property protections like copyrights, patents, or trade secrets.
Research and development:
Highlight any ongoing or planned R&D efforts that might lead to new products or enhancements, showcasing your commitment to innovation.
Thorough market research is not just a preliminary step; it’s a continuous process that should evolve as your business does.
How to conduct effective market research:
- Develop a business plan: According to the National Federation of Independent Business, a solid business plan significantly boosts your chances of success. This plan should comprehensively detail potential markets, define your ideal customer, and analyze your competition.
- Industry analysis: Incorporate statistics and forecasts that describe the current state and future prospects of your industry. Familiarize yourself with historical, current, and projected marketing data for your products or services.
- Competitor evaluation: Conduct a thorough analysis of your competitors. What are their strengths and weaknesses? How can this knowledge inform your strategy and help you secure a market share?
- Customer segmentation: Clearly define who your customers are. Segment your targeted market by size, demographics, and behavior to tailor your marketing strategies more effectively.
- Utilize affordable tools: Employ tools like Google Trends to gain insights into the search frequency of keywords related to your product or service. Surveys and focus groups can also provide valuable feedback on your minimum viable product, aiding in its refinement before a full launch.
Challenge No. 3: Doing everything yourself
As a small business owner, it’s natural to want to have a hand in every aspect of your business. You know your products better than anyone else, and who better to make decisions about your business than you? Moreover, you cannot possibly afford to hire resources worth tens of thousands of dollars annually at this stage of your business.
So you’re probably at the helm of your new boutique, managing everything from sales to stocking shelves and crafting marketing campaigns. This is bound to lead to significant challenges sooner or later.
Why? Because while small business owners are often experts in their products or services, they might not have the same expertise in accounting, human resources, legal issues, or taxes. These areas require specialized knowledge that can be crucial for your business’s survival and growth.
Also, juggling too many responsibilities can lead to business owner burnout and subsequent oversights as well as mistakes. Important tasks can fall through the cracks, and strategic opportunities might be missed. As your business grows, these challenges only become more pronounced.
How to navigate this challenge:
Recognize the signs of overextension:
Are you working long hours but still falling behind on tasks? Is paperwork piling up? These are signs it might be time to delegate.
Evaluate what to delegate:
Identify tasks that require specialized knowledge you don’t possess, such as financial management, legal issues, or human resources. These are areas where mistakes can be costly and time-consuming to correct.
Consider the cost vs. benefit:
Hiring professionals like accountants or lawyers does involve upfront costs. However, think about the potential long-term savings from avoiding legal troubles, tax fines, or flawed financial planning. Engaging a professional can also optimize your business operations, ultimately saving money and boosting growth.
Focus on your strengths:
Delegating allows you to focus on what you do best—whether that’s developing new products, improving customer service, or expanding your market presence. Let experts handle the rest.
The bottom line:
While cynical sayings like “most small businesses fail” are rooted in historical statistics, here’s a brighter reality: the landscape for small businesses is improving.
Sure, starting a business is tough and all, but businesses are learning to stick around longer. One-third of businesses created in March of 2013 survived for a decade, according to the Bureau of Labor Statistics. That’s right, we’re getting better at this game.
So, what’s the secret sauce? It’s about smart planning, tapping into the right tech, and yes, knowing when to call in the cavalry. You wouldn’t try to fill your own tooth or cut your own hair (well, maybe you would, but you shouldn’t), so why handle all the gnarly bits of running a business alone?
Here’s where CoCountant steps in—think of us as your financial sidekick. We’re here to help you plan, manage, and grow your business with less sweat and more strategy.
Ready to beat the stats?