No entrepreneur starts a business with the intention to fail. The first months and years of a startup are characterized by a lot of hard work, enthusiasm, and hope that it’s going to be a success.
Why is it then that more than half of all new businesses are toast within five years?
In 2017, the Financial Times reported that 49.9% of new companies in London lasted three years or less. At 46.3%, the national failure rate was a little better over this period in the UK. Only four out of ten small businesses are still alive after five years, with another 7% estimated to die in the next five years. That’s seven out of ten within ten years.
While it is useful to know how many startups fail, it’s more important to know why they fail. There are certain obvious reasons for failure, but it’s sometimes hard to pin it down to one. In most instances, it’s a mix of individual factors.
By knowing the reasons why such a high percentage of new businesses fail within 10 years, you can put various measures in place to prevent your startup from becoming a part of the statistics.
Cash flow problems
Figures released by the Office of National Statistics show that 90% of businesses fail due to cash flow problems. Nearly half of small to medium-sized UK businesses are being paid late, while thousands of others are unable to grow to their full potential because their money is tied up.
Some common reasons for cash flow problems are:
- Slow-paying invoices – Invoice factoring or offering clients an incentive to pay faster is one way of getting around this.
- High overheads – A regular audit of your expenses is necessary, followed by cutbacks where needed.
- Excess inventory – A product should be in stock for the shortest possible time before being sold.
- Insufficient gross margins – Determine the all-inclusive cost of delivering products and services before setting prices.
- Too much bad debt – Always review the commercial credit of clients before extending payment terms.
Failure to fill a market need
Finding a need and filling it is key to success. If you’re not solving a real problem experienced by real consumers/customers, your business has no basis to exist.
A new product or service, no matter how exciting, doesn’t matter unless you can demonstrate that it’s meeting a need. Unfortunately, many entrepreneurs fall into the trap of focusing on what they want to do instead of determining what people actually need.
After determining such a need, the next step is to figure out the best way to fill or satisfy it. Finding a gap in the market where you can dominate is one way of creating and offering a product which fills a need.
Here are four tips to help you find a gap in the market:
- Know what your strengths are. The outputs are so much better if you’re doing something you like and are good at.
- Find a niche in an existing market with unsolved problems.
- Copy an existing product or service and offer a better, more satisfying solution.
- Research the trends in established markets.
Once you’ve found a gap in the market, someone like https://www.qualitycompanyformations.co.uk/ can help you set up your new business.
Lack of teamwork
There’s a lot of truth in the saying “teamwork makes the dream work”. A solid founding team that supports and complement each other is crucial for the success of a new business.
Organized workflow where every team member knows exactly what his tasks and responsibilities are is one of the foundations for good teamwork. The benefits of effective teamwork are:
- Increased efficiency
- Improved communication
- Maximum output
- Increased creativity and innovation
- Motivated staff
Today’s teams look a lot different like those of 20 and even 10 years ago. The digital age has meant that teams don’t necessarily work together under one roof. Team members could be spread across the world and still form a formidable, effective team, providing leadership to ensure the success of a startup.
Entrepreneurs shouldn’t be afraid of welcoming seasoned advisors and mentors to help provide strategic and effective leadership in their team. On the other end of the scale, ordinary employees must feel inspired enough to feel part of a “tribe” where they are rewarded for good teamwork.
Not keeping up with competition
Successful businesses deliver real value which outperforms their competitors. If you can’t add at least as much value as your competitors, you are going to lose customers as quickly as you find them.
To get this right, you must first understand what drives value to your target customers. Identify those customers and segments where you can create more value relative to competitors. Talk to them, find out what they are looking for in a product, and make sure that you can give them what they want.
The next step is to create a win-win price and ensuring you focus your investments on your very valuable customers.
Lack of proper business systems
Proper business systems ensure a startup is run according to the business principles needed for long-term success. It puts checks and balances in place and prevents entrepreneurs from drowning in details, resulting in entrepreneurs neglecting important processes.
Must have business systems include:
- Accounting system – Thankfully, there are easy-to-use online accounting systems which do most of the work an accountant used to do.
- CRM – A customer relationship management (CRM) system is technology for managing a company’s relationship and interaction with customers and potential customers.
- Employee handbook – An employee handbook sets out the operating procedure for employees. It should include all important policies about what is expected in the workplace as well as the rights of the employee and the employer.
A great product or service means nothing if no-one knows about it. Entrepreneurs must learn to communicate what they’re selling in a clear, concise, and compelling way.
Can you answer the following questions from a prospective customer: “Why should I buy this product? What problem is it going to solve?” No-one is going to buy from you if you are unable to answer these questions.
Marketing is what ultimately drives sales. It includes advertising, public relations and promotions. Some great products have failed because of poor marketing. Do not fall in the same trap. Make provision for an adequate marketing budget, especially in the first year of your business.
Failure to focus
Lack of focus has killed many businesses. No matter how passionate you are, it is important to know when to stop adding more features to a product or service. Identify what really matters to your customers and stick to the key function.
The dangers of a lack of focus include:
- Every new product or every new feature of an existing product requires more infrastructure.
- Non-focused startups are more likely to lose market and investor intention.
Focusing on one or two key functions does not mean you shouldn’t innovate and adjust your product or service to keep up with the latest developments. The latter is important to preserve your competitive advantage and decrease the chances of product disruption.
Not creating effective sales funnels
A sales funnel is a series of steps designed to guide visitors toward buying a product or service. It’s the path taken by a potential customer on his or her way to make a satisfying purchase. There are different stages of a sales funnel. They are:
- Attract – Driving potential customers to your product or service through marketing and advertising.
- Convert – Convincing potential customers to share contact information through inspiring offers.
- Close – Efforts to encourage leads which result in paying customers.
- Satisfy – Providing a quality product or service that satisfies customers and inspires referrals.
Having a sales funnel helps small businesses create a consistent, organized process for sorting, evaluating, ranking and prioritizing sales leads.
Failure doesn’t have to be part of the vocabulary of a startup. However, it is hard to ignore the statistics that as many as seven out of ten businesses fail within ten years. That is why it’s important to know which preventative measures to take to prevent small business failure.
What if you do fail? You won’t be the first and you won’t be the last. Failure is not fatal.
Most successful entrepreneurs failed at least once before they made it big. The big secret is to learn from your mistakes and try again.
In the words of Mark Cuban: “I wouldn’t be where I am now if I didn’t fail… a lot. The good, the bad, it’s all part of the success equation.”
That said, there is no harm in stacking the odds in your favor by being aware of the most common reasons why businesses fail. This way, you can try to avoid them from the start.