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The Three Main Reasons Businesses Fail and How to Avoid Them

  • January 26, 2014
  • Written by
Reasons businesses fail and how to avoid them Reasons businesses fail and how to avoid them

There has been plenty of research done over the years regarding the failure rate of new businesses (I.e. It's pretty high). We're sure you've heard or read some of these stats yourself. This post is not going to regurgitate these stats or try spin them in a new way. Stats are just numbers and they don't really tell you the whole story or give you the "why" behind the results. So, rather than summarize the percentages of businesses that survive their first year we're going to talk about our actual experience and relay the three main reasons we've seen most business fail and what you can do to avoid them.

1. Lack of Marketing

You might be an excellent welder, plumber, fitness coach, hair stylist, carpenter, etc. but that doesn't mean anything if people don't know, like and trust you. The old cliché "build it and they will come" is one of the quickest roads to failure in business. New businesess especially need to be spending their time on marketing more so than anything else. This means making sure you're doing market research to know if there's enough customers to sustain your business, having meetings with prospective customers and networking every week, investing in a professional business image (name, logo, website), and getting involved in your community by supporting events or important cuases. It's only once you have established a customer base and started generating word of mouth referrals that you can start shifting your attention to other operational aspects of your business. Marketing is hard work and can also be expensive. It's important to be pennywise but think of your business like it's always going out on a first date - You want to make a good first impression and look attractive. A quote from Ted Turner summarizes things nicley - 'Early to bed, early to rise, work like hell, and advertise'.

2. Deficient Business Skills

More often than not most new entrepreneurs don't have formal business management education. Understanding basic accounting, business law, inventory management, time utilization, and human resources, to name a few, are often learned on the job through trial and error. Unfortunatley, one can only make so many errors until there are no more opportunities for trial. The management side of business is usually what entrepreneurs dislike the most and can struggle with staying on top of. They know it's important but they prefer to avoid it. It's actually a lot like excercise - We all know incorporating excercise into our lives is important for good health but it's something that is really dififcult to make time for or stick with. However, once you start excercising and seeing the benefits then it becomes easier and you wonder why you didn't start sooner. Exercise your business management skills by getting advice or training on a regular basis - Your businesses' bottomline will thank you for it. 

3. Underfunded Cash Flow

When it comes to business, having cash flow is more important than your mother. This might sound preposterous but money really is the lifeblood of your business and if you don't have enough then everything else you've been doing will be for not. The reality is that most small and medium sized businesses struggle for months before their profitable and even then maintaining profitability can be a challenge. Money worries are a huge stress and they can consume you which leads to other things being neglected (customers, family, relationships). It's critical that you have enough money in your business that you can ride out the bumps and still meet your financial obligations. Sometimes the answer is securing outside loans or investment. There's a number of sources for getting acess to capital besides your own piggybank so make sure you have a source of extra cash for your business becuase at some point you'll probably need it. 

Ready to Start a Business? Download our free eBook that is a step-by-step guide along with tools and resources to get started quickly and affordably. 

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About Community Futures: For over 25 years Community Futures has operated 13 offices across Saskatchewan offering rural residents access to business loans, advice, and support.