A Look at Why Most New Businesses Fail

Both anxiety and consideration are a large part of planning any new business, with the reality that most businesses fail within only half a decade; but why do most businesses fail so close to inception? According to the U. S. Small Business Administration, fifty percent of all small businesses are going to fail in their first year, and within five years, at least ninety-five new businesses fail. The likelihood of a business thriving is somewhat humbling, but knowing the reasons why most new businesses fail is essential for increasing the chances of success. Here are some of the reasons for new business failure along with methods that an entrepreneur can use to increase chances of success:

1. A Bad Location - Choosing a poor location that is unsuitable for your business is one of the main reasons why businesses fail prematurely. You would not want to place a curiosity shop in an inaccessible location or one with limited parking. Likewise, it makes little business sense to locate an eating establishment next to the city water treatment plant. Select a location that is optimal for niche customers and has great visibility, or set up a virtual storefront online for an even wider range of customer traffic. "Location, location, location," is not just for real estate.

2. Inexperience - Whether inexperience lies in dealing with the intricate functions of all business or in the business niche itself, a lack of experience is a top reason why many new businesses fail. Before planning your business, be sure that you know what you are getting yourself into; research all aspects of small business functionality, taxes, and advertising as well as the specialty details about your potential business itself. Whenever possible, consider developing a relationship with a mentor who owns an established business.

3. Poor Inventory Control Skills - Part of business success requires strong inventory control skills and shrinkage analysis. When a business owner can not keep track of inventory flow, ordering stock, loss, and the timeliness of customer shipping could suffer. Concise, well documented inventory control including regular cycle counting should be implemented for businesses with more than 600 pieces of inventory.

4. Unexpected Slow Growth - Low sales, poor customer repeats, and a lack of traffic all contribute to a slow growth for a new business. When a business is new, some slow growth, stalling, and even loss is to be expected. If a business owner plans for this reality, measures can be put into place to help a business thrive regardless of the lack of income for any given period. When businesses expect only growth and no loss, they could stretch resources too thin and bankrupt their new business.

5. Not Enough Money - Starting a business on a shoestring is possible but very difficult. Unexpected expenses and incidentals are both likely and common for new businesses. Plan for at least six months worth of operating money (for electric bills, employee salaries, etc.) kept in a special account for emergencies, and do not drain that account for any reason other than paying unexpected bills. Be sure to replace any monies withdrawn as soon as possible. This account should be maintained for the life of your business.

6. Unexpected Fast Growth - If your business grows too quickly, you may either see it as a problem or a challenge. When you have new customers, the success of your business requires that you deliver goods and/or services in a timely manner. When a business takes in more orders than they can fill, agrees to complete tasks that they are unlikely to be able to finish in a timely manner, or accepts prepayment for services that could be impossible to complete, they are risking breaking promises to their customers, which will impact loyalty, reputation, and possibly put your business at risk for legal action. Be sure to keep a mechanism in place to slow the flow of customers when necessary, and be sure to never bite off more than you can chew.

7. Competition - When you choose a business format and niche, it is important to analyze the need for this business in your community. Turnkey businesses must be especially careful not to open a business that would include stressful or strong competition. Be certain, if your business is in the same niche of competitors, it is unique in some way. If your business is an online venture, stay ahead of trends and marketing so that your competition has less of an impact, and maintain a healthy relationship with customers to hold a strong, trustworthy reputation.

8. Embezzling - We have all heard stories about white collar crime, but few business owners realize that they might be guilty of embezzling from their own business. In actuality, using business funds for personal reasons may seem like paying yourself for hard work, but in situations where you have a loan, a business partner, or just a fledgling business, raiding the cookie jar can be the kiss of death for your business. Whether you buy a lunch every day from the cash register, or you take petty cash as a salary, spending the money necessary for business growth is a major mistake that many small business owners make without the conscious realization that they may be hurting their business. Plan for a salary for yourself and stick to it. Do not dive into the register whenever you need a new shirt or a pizza, and keep track of all business spending!

9. Weak Credit Planning - Poor credit arrangements tend to crumble more businesses than they help. Some potential business owners are willing to swim with sharks just to get things off the ground. This can be an exercise in futility. High interest loans, fall-through funding, and grants that never materialize can all destroy a new business. Be sure to research all funding possibilities prior to committing yourself, and if something sounds too good to be true, it likely is. In addition, be sure to look at the future of a large loan. Never plan for heavy growth with your business when taking out a loan or using credit to obtain inventory or business related goods.

10. Over-Investment in Fixed Assets - Fixed Assets, or the capital goods a business owns, are basically your property, plant, and equipment for running a business, all of which can not easily be converted into cash. Your property is the physical location of the business. Plant refers to fixtures and interior needs, and equipment refers to items like computers and automobiles, which are also necessities for business. Over-investment means buying too many fixed assets, or buying fixed assets that are too costly. The answer is a strong budget, which must be adhered to.

Strategically planning a business is essential for its growth and survival. It is important to be aware of the reasons why most new businesses fail to avoid the common mistakes new business owners make in planning and executing their business strategy, but do not be discouraged by this list of pitfalls; many businesses thrive, and most big businesses started out as fledglings with only a great idea and a headstrong owner to get them started.