Top 10 Reasons Businesses Fail Within 5 Years
People start their own business thinking they’ll have more control over their life. Free reign to work at your own terms, exploring new ideas without anyone else’s approval and managing your personal finances are some of the reasons why people want to start their own business. The words “be your own boss” are too tempting, and most people give in to this temptation assuming they’ll ace in the entrepreneur world. However, the reality is very different.
If you are planning to start a new business, you should know all the gritty challenges that you might have to face. The statistics say that more than 50% of new companies fail. This startling percentage of failures makes you wonder what exactly these new business owners are doing wrong.
Here, we will walk you through the many reasons that cause your business to fail. These reasons have been learned through trial and error by business owners over the years. It will be beneficial to know them if you plan to start a new business or have already done so.
To avoid dumping all the unnecessary information that you do not need to know, we have picked the top 10 reasons that can cause your business to fail within the first five years. Read on to find out.
Lack of Working Capital:
For any new business to stay afloat in the entrepreneur world, working capital is an important metric to keep track of. Simply put, working capital is the amount you get after subtracting your liabilities from your current assets. Your current assets include everything from inventory to customers’ unpaid bills; more specifically anything that you can profit from within one year is your company’s current asset. On the other hand, a current liability means the amount of capital you need to pay to your creditors within one year.
One can know a company’s efficiency and capabilities by calculating its working capital. A Lack of working capital means that a business is barely making it from one day to the next. There are many ways a lack of capital can affect your business, such as:
- Most investors rule a company operating without sufficient assets as a liability. For lenders and investors, current statuses are the measure of what a company can return on its investments. These investors and lenders are important for new business owners to establish their business.
- A company’s lack of capital affects its daily working capabilities and sufficiency of current assets. Current assets account for everything from paying bills to paying your employees. If you fail to manage your current assets the way you should, then your company’s daily routine will be affected and you won’t be able to scrape through if unforeseen trouble rises.
- Often times when your working capital is in negative, it diminishes your business’s chances to grow and expand. To counter negative working capital, companies borrow additional capital to keep their working capital in check. Improved conditions of working capital are necessary for any growing business to stay viable for the long-term. Cut costs if necessary!
Lack of Management Experience:
For a new business owner, their everyday decision at work is what defines the company’s future in the entrepreneur world. To run a business, it is essential that the owner should have a clear vision of what they want from it and how they intend to take it across profit margins.
There are many great people around the world, from celebrities to athletes, that have lost their careers because of their poor life choices and decisions. You might wonder how exactly your inability to make apt decisions will affect your company’s future. Here is why:
- Every day, there are plenty of decisions a new business owner has to make, from hiring someone to deciding how to get more investors to invest. If you are unable to follow through with your decisions or are not confident enough to take the lead, your business is bound to suffer greatly.
- Sometimes you are not the only one calling shots when it comes to your business. Your investors or shareholders make up a managing body that has a say in what goes around in your company. If there is a conflict and a communication gap among the members of the managing body, it is unhealthy for your company’s growth.
Poor management and leadership skills can be a blight to a growing business; it can destroy its potential success and leave the owners devastated.
Lack of Talented and Skilled Employees:
For any business to make leaps and bounds, people working for its success and progress are the most important. According to the latest statistics, organizations and business owners are having difficulties to find people that are better suited for their available vacancies. This talent shortage has been going on since 2007.
If the people working for your company are not skilled and talented enough to deliver the desired results then your business will take a nosedive. While hiring people, every organization looks for a basic set of skills in their employees. These skills are stated below:
- When your business is at the early stage, you look for people that have worked before in the related fields and are experienced. Leaving your company in the hands of amateurs won’t get your business anywhere.
- An employee’s set of related hard skills is important for a company to make most of their talent. These skills can include physical abilities such as typing, dealing with computer programs and software etc.
- Not only hard skills but soft skills that cannot be measured and are attributes of a person’s personality such as leadership and teamwork are also necessary to yield better results for your company.
When asked about the many difficulties that a hiring team faces, most of them say that a lot of inexperienced employees will ask for hefty salary packages, which doesn’t benefit their business in any way.
If you’re running a business that can be categorized as a part of the cyclical industry, it is likely that your business will suffer during economic recessions. The cyclical industry is tied to business cycles, that is, if an economy grows then your business will flourish too, but if the economy shrinks so will your business.
It is common knowledge that during a recession people hold off buying luxury items such as cars, houses and other household appliances, but they don’t stop paying their utility bills and ordering food. If your business is part of a cyclical industry, then it is bound to suffer along with the economy.
It is best advised for startups to not opt for the cyclical industry because it is a risk that will cost them not only their money but also their dreams if the economy takes a turn for the worst.
Lack of Funding:
For a growing business, investments and funds hold significance like nothing else. This goes without saying that financial stability is the backbone of any business.
One common way to acquire loans is by getting profitable investments on the table. For this, your working capital should be impressive enough to convince your investors about the profits your business can make in the future and how it will do so.
In order to continue getting these investments and funds, a company’s performance should be impressive in terms of profits and performance.
Wrong Business Location:
The potential success of your business is directly proportional to its location. There are many ways location accounts for your business’s success, such as accessibility, customer traffic, tax benefits etc. Following are the details of these reasons:
- Accessibility: If your business is located in a remote area or somewhere far from the hustle bustle of the city and you can only get there by making an out-of-route detour, then it’s not good for your company’s health.
- Customer Traffic: Before starting your business, pay close attention to the demographics of its location and what kind of audience you’ll be serving. If the nature of your business doesn’t match well with the demographics, it will surely affect your business.
- Tax Flexibilities: While starting a business, owners should look for any way they can conserve capital and make a profit. Looking for a location that allows relief on a few or more taxes will help you do just that.
Inability To Fulfill Contracts and Win Bids:
Securing a bid and winning a contract is not only beneficial for your business economically, but if you fulfill your contract just like the contractor intended, it adds esteem to your company’s profile, but failure to do so brings equally damaging results.
Winning bids is not an easy feat and require careful planning and impressive proposals. These bids help to build your reputation one contract at a time. If you perform poorly, it reduces your chances to bag future contracts, which will put a dent in your company’s progress.
For a business to run smoothly, everything from licensing to business tax liabilities is of the utmost importance. Tax liabilities of any business are the short debts that a company owner has to pay to the government. These taxes should be paid to avoid any kind of legal strain on your business, but if an owner fails to do so then it burdens the company’s finances. This is how a company can be shut down even if it’s making a profit.
Limited Concentrated Clients:
For any business to grow, its customers are the key contributors. They not only bring profits and add esteem to your name but your customers define how far you can take your business.
There are two types of concentrated clients, high concentration clients, and low concentration clients. These two are explained below:
- High Concentration Clients: This means a company has few customers that bring in large-volume of revenue.
- Low Concentration Clients: This means that a large number of customers bring in small profits and revenues that account for the overall profit of any company.
By observing these two types of clients, it seems that a high concentration of clients will bring in more trouble to your business than a low concentration of clients.
For instance, pleasing big clients for a growing business is not easy. There is always the chance that they will leave your company if it doesn’t benefit them and then your company will go in losses because one of your largest customers has bailed.
For growing businesses, securing customers that bring in small profits but are not difficult to please is much better. Though it is hard to turn down big customers when you know, they will surely bring in large revenues, but one must see the bigger picture when it comes to establishing a business.
The world is changing every day, so is the way humans go about in their daily lives. Businesses are no exception. For a business to go a long way, adapting to the changing world and its preferences is necessary. Complacency is dubbed as the silent killer of businesses. When an organization or a company refuses to show flexibility and change its status quo, this rigidness can raise many difficulties for its progress.
It has become common knowledge that if one wants their business to keep growing, their company should keep up with the latest trends of the related field and industry. No company should feel comfortable and enjoy the monotony that a brief success period offers because in this economy, many businesses small or big surrender in front of complacency.
Starting a business is no ordinary feat. It is a challenge that requires strong leadership and management skills. Keeping track of what’s benefiting your company and what’s not is the prime role of a business owner. So, it is understandable to read through the articles and research that tell you about the potential problems that one will face through the early years of your startup. If you keep dealing with these hurdles efficiently, you will be able to avoid potential failure.
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