According to Small Business Administration research, only half of new businesses survive for the first five years and only one-third of new businesses are able to survive for 10 years. The inverse is compelling as we can conclude that if only 50% of new businesses survive for the first five years, then the other 50% fail in the first five years.

We can also conclude that about 65% of new businesses don’t make it to the ten-year mark.

Forbes reports an even more grim statistic, based on Bloomberg research, that of every 10 businesses, eight fail within the first 18 months.

What are the reasons businesses fail to thrive, given a 50/50 chance of survival and assuming a product or service for which there’s a demand?

Let’s discuss six reasons why most of businesses fail at their early stages and some ways you can avoid it.

Reason #1: Unprofitable Business Model

Most of entrepreneurs are too optimistic about how easy it will be to acquire customers and they fail to develop a successful business model. The business idea may be good but failure may come in the implementation of the idea if there are no strategic guidelines in place.

Building a company on a business model that is not sound, operating without a business plan, and pursuing a business for which there is no proven revenue stream… affect the businesses at the early stage.

How to Build a Good Business Model: Research and review the way other businesses in the industry operate. Develop a complete business plan that includes financial forecasting based on predictable revenue, strategic marketing, and challenge management solutions to overcome potential obstacles and competitor activities. Create a milestone chart with specific tasks and objectives assigned along the timeline so you can measure success, solve problems as they occur, and stay on track.

A sound business model that incorporates best practices can help your business avoid failure.

Reason #2: Market Problems

Little or no market for products or services that you have built is one of reasons why most of businesses fail at their early stages. Most of entrepreneurs start their businesses without conducting any market research and consequently they fail to develop products that meet the market need.

What makes a business idea great in the first place is “whether it solves a need”. Identifying a need in the market before pulling the trigger is critical to business success. You can have the greatest product in the industry, an effective pricing structure and a huge budget, but if no one wants what you’re selling, there’s not much you can do to save what is destined to become a sinking ship.

However, if you’ve done the work of identifying a need for your product or service and are catering effectively to that market, your business will fail if you neglect to stay in touch with your customers and understand what they need and the feedback they offer. Your customers may like your product or service but, perhaps they would love it if you changed this feature or altered that procedure. What are they telling you? Have you been listening? Or is the market declining? Are they even still interested in what you’re selling? These are all important questions to ask and answer. 

How to Avoid Losing Touch with Customers: A successful business keeps its eye on the trending values and interests of its existing and potential customers. Survey customers and do market research and find out what their interests are and keep abreast of changes and trends. Effective customer relationship management can help keep your business from failing.

Reason #3: Lacking Uniqueness and Value

You may have a great product or service for which there is strong demand, but your business is still failing. It may be that your approach is mediocre or you lack a strong value proposition. If there’s strong demand, you probably have a lot of competitors and are failing to stand out in the crowd.

How to Avoid Value Proposition Failure: What sets your business apart from competitors?  How do you conduct business in a way that is totally unique? What are your competitors doing better than you are? Develop a customized approach or service package that no one else in your industry is using so you can present it as a strong value proposition that attracts attention and interest.

This is how you build a brand. Your brand is the image your customers recognize and associate with your business. Your brand identity, including your logo, tagline, colors, and all the visible aesthetics and business philosophies that represent your company should be supported by your value proposition. It should separate you from the pack and present your individual perspective to your customers. Do everything you can to present that unique value proposition to your market so you can capture a market share and begin building your conversion rates.

To publicize your brand and set yourself apart, you will also need to step up your marketing plan and use as many venues as possible to present your brand to the public. You may be far better than your competitors but that won’t make any difference if your prospects don’t even know you’re in the game. Use social media, word of mouth, cold calling, direct mail, and other tried-and-true marketing techniques. Ensure you have a well-optimized online presence, develop lead generation and contact information capture techniques such as offering high-quality content on your site, a subscriber newsletter, and information giveaways.

Reason 4: Poor Financial Management

Effective money management is an important factor that contributes to the business success.

You must know, down to the last dime, where the money in your business is coming from and where it’s going, in order for your business to succeed.

Your business can also fail if you lack a contingency funding plan, a reserve of money you can call upon in the event of a financial crisis.

Sometimes people start businesses with a dream of making money but don’t have the skill or interest to manage cash flow, taxes, expenses, and other financial issues. Poor accounting practice puts a business on a path straight to failure.

How to Avoid Financial Mismanagement: Use professional business accounting software like QuickBooks to keep records of all financial transactions, including every expenditure and all revenues received, and use this information to generate income statements (profit and loss statements). This is valuable information that you need to run your business, know where you stand at all times, and keep it operating in the black. If you lack skill in financial management, consider hiring a business advisor or professional Accountant to help manage your financial affairs.

Reason #5: Leadership Failure

Your business can fail if you exhibit poor management skills, which can be evident in many forms. You will struggle as a leader if you don’t have enough experience making management decisions, supervising a staff, or the vision to lead your organization.

Weak management teams make mistakes in multiple areas: on strategy, at execution… and build weak teams below them; and finally, the rest of the company will end up as weak.

How to Avoid Leadership Failure: Dysfunctional leadership in your business will trickle down and affect every aspect of your operation, from financial management to employee morale, and once productivity is hindered, failure looms large on the horizon.
Learn, study, find a mentor, enroll in training, conduct personal research—do whatever you can to enhance your leadership skills and knowledge of the industry.
Find a Consultant to help you develop and implement guiding rules and regulations as well as policies and procedures.

#Eliel RUGWIZANGOGA, Business Development Consultant.