Editor’s note: This article was first published in August 2014; the further-reading link to an article on the best business ideas for 2014-2015 reflects the time of writing.
Every entrepreneur starts out full of excitement and expectations when they decide to launch their own business. But the reality is that the failure rate among small businesses is high, both in the number that never get off the ground and in the number that fall when it’s time to make the leap to consolidating the business.
A great many risks can be avoided with planning that goes beyond a simple market study and business plan. A business owner who is just starting out should know what is most likely to happen.
Some time ago we looked at the main mistake small business owners keep making. We also covered the 11 most common mistakes first-time entrepreneurs make. Along the same lines, let’s look at the conclusions reached by the experts consulted by CNBC, which are well worth bearing in mind.
1. Running out of money
The number one reason a company closes is that it runs out of money. In other words, the business no longer has the money to keep operating and meet its payments and obligations.
2. No financing to get through it
Once liquidity problems arrive, so do the problems of finding financing to deal with the new situation.
Of course, much of the reason a company runs out of money is sometimes a planning error, because, as we always say, entrepreneurs should estimate costs on the high side and income on the low side. You should never be optimistic when it comes to the business’s finances, because the “scenario” we had forecast rarely comes true.
Many other companies have high revenue but suffer from poor cash flow. Remember that small businesses greatly underestimate the importance of cash flow, when in reality it is everything.
Not being able to pay salaries or insurance, or even keep the lights on, is sometimes down to an invoicing problem, and the problem can be as simple as getting paid at 90 days while paying suppliers at 60 days.
3. Overconfidence
At some point along the entrepreneurial path, overly innovative and strange business ideas get praised, but the truth is that most startup founders are simply wasting their time, because their startup is doomed to fail from the start.
These entrepreneurs don’t listen to the advisers who tell them their idea is too risky, because stories get published about exceptions, where a teenager in his underwear at home created a 1-billion-dollar idea when everyone told him he was crazy. The truth is that tech ideas have the highest three-year failure rate (90%).
When everyone tells you your idea has no future, it most likely doesn’t. It’s only a short step from bravery to idiocy when the risk doesn’t justify the reward.
4. Pricing strategy
For your business to be profitable, you may need to charge more for your products or services than the customer will be willing to pay.
Nowadays market research has to be much broader, since most products can be bought online, and if our product has nothing that sets it apart from the competition, we won’t be able to charge the price our company needs to survive. This means we need to know the real margins on our products. In other words, the price we must sell at to make money (not lose it). And that price isn’t always consistent with what a customer is willing to pay.
5. Fights between partners
We don’t always choose a partner because we need them. Very often an entrepreneur looks for a partner to share their fear and risk. At other times we look for a partner-investor, with whom we will share our profits but not the work.
And at other times, fights between partners simply break out for no particular reason. When that happens, just as in the best divorces, the children are the ones who suffer. In this case, the one that suffers most is the business.
(Read: tips for choosing a partner for your business)
6. Lack of effective marketing
You can have the best product in the world, but if nobody knows about it, you won’t sell. Small businesses lack the financial means of large corporations, but that’s no reason to leave advertising and marketing to chance, because that condemns the business to failure.
A company should be making itself known at all times, whether through offers, traditional advertising or online advertising. Nowadays, with well-done work on social media, the budget for making our brand known can be minimal. But it has to be done.
7. Not joining the digital revolution
Maybe the internet is the future, maybe it’s a fad… that doesn’t matter. Today it’s where people are, and so it’s where our company needs to be. Tomorrow we’ll see where we need to be. Many companies are closing because of the internet. Others are bouncing back thanks to the internet.
Let’s just say that some companies see it as a threat while others see it as an ally.
8. Underestimating the competition
Small business owners tend to underestimate competitors who seem smaller because they’re just starting out. They believe their product or service is the best, and that the other company’s days are therefore numbered.
And it may be true that the other product is much worse, but the fact is that a bad product with a strategy sells far more than a good product with no strategy at all.
Among the other reasons companies close, we would also find cyberattacks, theft and accidents.
Depending on the market niche you work in, it’s estimated that 60% of companies that suffer an attack and data theft end up closing, while not being insured against certain disasters is also a reason for closing for good.
Further reading
- A simple application of concepts for business success in 15 steps
- The 32 rules for being a successful business owner
- The 20 best business ideas for 2014-2015
Featured image: Sintegrity, CC BY-SA 4.0, via Wikimedia Commons.
