10 Common Reasons Businesses Fail in their First 5 years

Setting up a new business is never easy and there are a number of similarities between the businesses that do not survive their first year. Therefore to make sure that your business is ready for the challenges ahead, we have put together some of the key things to look out for.

Preparation

Setting up a business before it is ready is an issue for many businesses. All the gear no idea? Some ideas are great, but the entrepreneur is so excited to get it started, they forget to prepare properly. This can include anything from cashflow to understanding how to deliver  on their promises.

To get over this, make sure you plan. Know what issues you may encounter and how you will overcome them. This can be started by completing a comprehensive business plan with tools such as our free Business Plan Template, so that you can give your business the best possible chance of survival.

Goal Setting

Once you are up and running you will get stuck into the day job. The problem occurs when a business owner spends too much time being busy in the business and either forgets or runs out of time to focus on the business.

The consequence is that your business will stop developing and you may never get round to spending time on areas such as recruitment and developing new products and services.

The best thing to do is take a step back and create a series of SMART goals and milestones for your business in its first 12 months. Where will it be in 3 months? How many sales will you have done? How will you have achieved that? These are the questions you need to be asking.

By writing down your vision & goals in a SMART way, you have a handy ‘how to’ guide bespoke to your business that you can go back to each week to make sure you stay focused and on track.

Cash burn

THIS IS THE NUMBER 1 REASON WHY BUSINESS FAIL. Every business, no matter how big or small can suffer from cash burn. Even some of the biggest business with millions of pounds worth of seed investment fail due to burning through their start-up capital.

This effectively means you spend all of your capital (usually on staffing, offices and misguided marketing) before you have established the cashflow you need.

Plan how you are going to spend your capital sensibly with a Cashflow Forecast Sheet, and how it cross references with revenues. There is never enough money, so use it wisely and ensure that you invest it rather than spend it in the early days. Outline where you are going to be spending your capital, how long it will last for and when you expect to see a return.

Being afraid to invest

Many business owners are afraid to invest in their business. This can come in many shapes and forms, but often results in business owners keeping money in the bank rather than utilising it in ways that will help the business grow.

This can result in the business not investing heavily enough in the product, service or marketing when launching, meaning that they do not attract clients and when they do they do not deliver on the service proposition.

This comes down to 2 things. Firstly, cashflow & budgeting. If you have the money, understand where you are going to invest it to make it work for you, whether it is in people, technology or marketing. Secondly, testing and measuring the results. If you know which marketing activity is reaping rewards, focus your budget there. If you see that for example you get no return from your investment in social media advertising, review why and refocus your efforts.

Delegation

When you set up a new business, reputation is everything. Many new business owners like to keep control of everything going on in the business. This means that you will run out of enough hours in the day to actually run and grow your business. As such it is important to delegate.

Remember to invest in people. If you have a Sales Manager, let them manage the sales team. If you are spending all your time on the bookkeeping and it stops you from growing the business, hire a Bookkeeper. By surrounding yourself with good people who are empowered in their role, you will be able to focus your time make your business successful.

Check out our 5 steps to better delegation to help your business grow

Impatience

Success doesn’t happen overnight. Some business owners give up in the first 12 months if the business is not generating the revenues they were expecting.

Persistence and patience are critical. If you truly believe your business can succeed then you need to give it a chance. Again, it comes down to comprehensive planning, so that you know when times are tough there is light at the end of the tunnel and it will all be worth it. It is also important to speak with your peers, be open to communicating with others about your challenges.

Not using data

“You can have data without information, but you cannot have information without data.” (Daniel Keys Moran).

If you start your business based on assumptions, then you are relying on luck to succeed. Many firms that fail in their first year have worked on assumptions about their clients and their business, rather than really getting to know their numbers.

By collecting data, you can make informed decisions in your business, remain flexible and identify any weak points before the cause a terminal issue for your business. This includes basic KPI’s such as enquiries, conversion, sales, turnover and margin, as well as information about where your leads come from, who are your clients? What are the busiest hours of your day? What are customers saying about your business? What are your biggest costs? Collect the data, listen to it and learn from it.

Check out our Free Advanced Excel tutorial to help you capture more usable data

Asking for help

Entrepreneurs can be very cagey about discussing their business. Be it because they are worried about someone taking their idea, fear of failure or fear of challenging feedback, these all stop constructive conversations.

Share your thoughts with those you trust to be honest with you. No one expects you to know everything and everyone has a different opinion. Opening up to those around you and involving them in your thought process will encourage new ideas to develop will allow you to view your business objectively.

Not getting paid quickly enough

Invoicing is an issue for a lot of small business. It is especially true of the service industry, where invoices are sent out manually.

It is surprising, but true, that many business owners are too busy in the job, that they don’t make time to invoice their clients and chase payments. In turn this damages cashflow and the ultimate success of the business.

Recently, I had new carpets fitted, the fitter did a great job, but 2 weeks after they did the work they still had not sent me an invoice. It was me that chased them and eventually they sent me an invoice with payment details 1 month after they completed the job!

Therefore, make it easy for customers to pay you. Afterall, that is why you are in business in the first place.

Prioritising bringing money into the business is of critical importance when you first establish the business as money is tight enough as it is.

There are some fantastic modern payment routes that will be a great asset to your business if you invest in them. Have a look at our Top 5 Payment gatewaysto see if they can benefit your business

Not committing

A typical reason for small business to fail is that the owner simply does not commit. Starting a business takes an awful lot of time and you need to invest that time in order to see the rewards. If you don’t commit to your business, why should customers?

Effective time management will help you to maximise your efficiency.

Show commitment to your business by cutting out procrastination. If you are setting up alongside a full time job, make every evening count. Plan your time, and know what you are going to achieve each day and week to make your vision a reality. If you fully commit then the world is your oyster.