70% of new businesses will fail. 50% of these will be in the first 3 years. These are statistics that every entrepreneur has heard.
If the statistics hold true, how is it that we’re not learning from all those business venture mistakes? While there are many reasons why businesses go under, the reasons go further than the most commonly cited – lack of capital. Below are the 10 most common warning signs that could lead to business failure. Take note then take action.
The warning signs
- Going into business for the wrong reasons. Are you starting a business just because you can? Starting a business requires a lot of hard work so make sure you are doing it for the right reasons, and that you are passionate about the business. You’ll be required to make sacrifices when it comes to family, friends and personal time, so best you love what you’re doing.
- No planning.If you don’t know where you’re going, you’ll never get there. To grow and be successful you have to actively work on your business. As the saying goes, failing to plan is planning to fail. It’ll be your role to clearly define and communicate the corporate vision. If there is no vision, a flawed vision, or a poorly communicated vision, the responsibility will be yours. Knowing why you’re going into business will enable you to ensure you align your vision with your corporate values. The result will be solid leadership.
- Choosing a business that isn't very profitable. It sounds like common sense, but many new entrepreneurs fail to understand the importance of profitability. Just because your business generates lots of activity doesn’t mean there are profits. If these do not materialise, you’ll not have enough money to sustain and grow the business. It’s also important to make sure that you price your product or service correctly.
- Failure to adequately anticipate cash flow. Positive cash flow is critical.When you are just starting out, suppliers require quick payment for inventory. If you sell your products on credit, the time between making the sale and getting paid can be long and cash will be scare. If you fail to plan for this, your business may close down.
- Insufficient cash reserves. Lack of cash is the single most common reason for business failure. If you don't have enough cash to carry you through the first six months to one year before the business starts making money, the outlook will be bleak. You need enough cash to carry you through the sales cycles and downward trends. To determine how much cash you require in those first 12 months, take into account both business and personal expenses.
- Overdependence on a single customer.Pay attention to your revenue sources. Don’t get into a situation where you have one customer so big that losing them would mean closing up shop. If you have one customer providing 60% of your income, ask yourself what would happen if they left or went out of business. Where would that leave your company? Having a large base of smaller customers is a much safer bet as it will mean you’re not dependent on any of them.
- Failure to clearly define and understand your market.Who are your customers and what are their buying habits? You should be able to clearly identify them in one or two sentences. Customers are the only people that put money in your account. Without them, you won’t survive. You need to know how you’ll reach them, whether your product or service is seasonal and what you’ll do in the off-season if it is, how loyal they are to their existing supplier, and whether they’ll buy just once or keep coming back.
- Uncontrolled growth. Slow and steady wins the race. Predictable, planned growth is vastly superior to huge jumps. It's hard to believe that too much business can destroy you, but the fact is that going after all the business you can get drains your cash and actually reduces overall profitability. You may incur significant up-front costs to finance large inventories that’ll allow you to meet new customer demands. Remember that if the economy takes a dive, you'll be unable to pay back those loans. In addition, going after everything usually means you become less selective about customers and products, both of which can be bad for business.
- Believing you can do everything yourself. One of the biggest challenges for entrepreneurs is to let go. To grow and thrive, you cannot maintain hands-on control of all aspects of your business. If you’re the only person who is able to make decisions, what will happen when you go on leave or take a few days off because you are ill? Give your employees responsibility and authority, and you’ll empower them to help you grow the business.
- Falling out with your business partner. It's inevitable that partners will occasionally differ on how to run a business. Where a climate of mutual respect characterizes the relationship, disagreements can usually be quickly and easily resolved. If this is not the case, disputes can become crises. Make sure you have a solid partnership agreement in place that defines the nature of your relationship and what will happen in the event of a fallout. A business partnership is like a marriage, so you should ensure that you’re going into business with someone who has the same ethics and integrity as you. The same same vision for the business is absolutely essential. When there is a disagreement, an honest exchange of views may be all that is needed to solve your differences.