People often say that a new business has frequently failed before it even starts, even though its founder doesn’t know it yet. As Sun Tzu put it in The Art of War (applied to business), every battle is won before it is fought. In other words, while some people talk about luck when a business succeeds, others call it strategy or proper planning. But why do businesses fail at the beginning?
The starting point is that most of the mistakes we make as entrepreneurs happen at the very beginning, and those mistakes are what seal the future of our company; some businesses fail before they’ve even got off the ground. To understand why a company fails, we need to look at the most common mistakes.
The 10 reasons small businesses fail when they start
1. Trying to grow too fast
Growth is healthy and every entrepreneur wants it, but chasing quick profits without first laying solid foundations is a serious mistake. Over-expansion without organization is lethal for a business. Sometimes it’s the investors themselves who sink the business by pressuring the founder for quick results.
Growth should happen gradually. Sometimes starting big in the hope of supplying the whole market with a new product is exactly what leads us to take on too much debt while giving our first customers poor service.
Having more customers than you can serve is the number one reason a company ends up with no customers at all.
2. Poor tracking of finances, or mixing finances
A big mistake among Spanish-speaking business owners is mixing the business’s finances with their personal ones. Paying personal bills and loan installments out of the company’s profits stops us from knowing whether the business is profitable or losing money.
In many cases people say the business doesn’t make enough money, when in fact it’s very profitable but our personal expenses are far too high. (Read: The most common mistakes Spanish business owners make)
3. Too much debt
It’s hard to avoid this one, because most new businesses start out with credit and loans of every kind. A large share of small businesses close because they can’t keep up with their loan payments, sometimes before their commercial activity has even taken off. That leads us to the next point.
4. Poor planning, or a flawed business plan
Although we always recommend writing two business plans (the one you present to get financing and the real one), most people don’t spend any time on the second.
You need a business plan that puts you in the worst-case scenario, because believe me, expenses will always be higher than forecast and revenue lower than expected. Even the time it takes to get going is usually longer than we think, so we need to know this completely adverse picture in advance in order to prepare our strategy.
5. Lack of reserve capital, another reason companies fail
Some business owners say that if you don’t have a capital reserve that could protect your business financially for at least three bad months, you might be better off waiting, because practically every company goes through that situation in its early days.
It’s a situation that causes a large share of companies to close, companies that could have succeeded but drowned in a passing storm. A capital reserve in a business is what financial education calls an emergency fund.
6. Choosing the wrong premises
Premises in a central location cost more than ones on a quieter side street, but the central spot will probably be more profitable even if we pay twice as much. It’s a matter of doing the right market research. In other cases the problem is the lack of any market research at all.
Some entrepreneurs have dared to open a supermarket opposite a Carrefour, or a computer shop two kilometers from a Media Markt. Others have opened a clothing store on the same street as five top-tier clothing franchises. That isn’t necessarily bad in itself, but to make it work we need either a better price or better quality.
7. A mediocre business with mediocre staff makes for a mediocre business
Poor execution, bad customer service or widespread incompetence among employees will sink a business fast. When we start a new company, we shouldn’t just look for cheap workers. We need professionals in the role they’re going to perform. Customers won’t give you any slack or understand that you’re just starting out.
All they’ll understand is that they bought or hired something. The service was either good or bad, and that’s exactly what they’ll tell other potential customers.
8. Adaptability and flexibility
I read the other day that 70% of companies don’t survive change. The ability to recognize opportunities and be flexible enough to adapt is essential to survive and thrive in business.
9. Not understanding marketing
Suppose you’re an excellent professional in your field, you surround yourself with the best people and you have an excellent product or service. The truth is you have nothing if people don’t know you’re there.
Many business owners take it for granted that customers will walk through the door of their business on their own, and that has changed. Now you have to help them through the door, and that’s called marketing. Fortunately, these days you have the same opportunities in this area as a large company.
(Read: 9 marketing strategies for small businesses on almost no money.)
10. Underestimating the competition
You should always be one step ahead of your competition, and your competition is anyone, big or small, who sells and offers the same thing you do. Many big players fall, but many small ones manage to grow. If we combine several of these mistakes, this would be the one that closes the most businesses, for the simple reason that we start a business thinking we’re going to sell X, and as it turns out we don’t sell X, yet those sales did happen. Someone else made them. One way or another, we underestimated the competition, and in the end we’re the ones who close while big and small competitors stay open.
Further reading
- The 10 commandments for guaranteed business failure
- The main causes of failure in business and in life in general
- 10 tips for raising entrepreneurial children
Featured image: Closed and Shuttered ex Co-operative Shop – George Street by David Wright, CC BY-SA 2.0, via Wikimedia Commons.
