If you have ever thought about starting a small business, you have probably encountered the frightening statistic that close to eighty percent of all small businesses fail in the first five years. Those statistics sound discouraging, and there is no doubt that many small business do fail. However, some small businesses close because the owner has accomplished what they wanted to do and moved on to another goal, but “failed” is defined by the business closing. Potential entrepreneurs often decide against opening a small business out of fear of becoming another statistic. There are numerous reasons small businesses fail, but there are steps you can take to make sure it doesn’t happen to you.
Five tips to avoid small business failure
- Identify your market—You might have a great business idea, but if you do not know your market, then your odds of failure go up. Too often, new business owners either attempt to start in a market that is already saturated with similar businesses or there business idea doesn’t fit the market of the area. If you want to start an entertainment enterprise that caters to young families and teens, but the demographic of your area is primarily retired people, you have little chance of success.
Take the time to do an in-depth market analysis and research before you proceed with your business idea. Not only will this help launch your business more successfully, but the data you gather will also help you grow and expand your business in the future.
- Develop a written business plan—Many people think they only need a written business plan if they are seeking traditional financing for their small business. This could not be further from the truth. At a minimum, your business plan should list your specific objectives, strategies for success, how you plan to market your business, and the amount of money you need to start. Your business plan is the roadmap for your business, and should be frequently updated as your business changes and adapts over time.
- Seek advice from others who have started similar businesses—Having an advisor can give you insight into things you haven’t considered for your business. They can often offer tips and tricks to help you avoid costly mistakes. Even if your contact is someone whose company failed, they can share valuable information about what not to do.
- Maintain flexibility—Adapting to change and finding out what works and what doesn’t is a crucial part of running a successful small business. Many small businesses fail because they were unable or unwilling to change their business model to accommodate an ever-changing marketplace. One thing you can count on is that no matter how successful your business is in the beginning, you will have to adapt to changes as they come.
- Take a course in business finance or management. You can often find these types of courses offered through the Small Business Association in your area, or as continuing education classes in a local community college. The more you learn about managing the revenue generated by your business, the fewer costly mistakes you will make. These mistakes are often the death knell for small businesses, so taking advantage of inexpensive courses that can help you avoid them is an intelligent move for first-time business owners.
Common causes of small business failure
Unsurprisingly, the most common cause of failure for a small business is running out of working capital. Business owners know how much revenue their business is generating, but they fail to plan for unforeseen expenses and tap out all their sources’ of money. Though it is smart to reinvest revenue back into your business, you need to maintain some liquidity to deal with unexpected expenses that arise in every business. Ineffective or insufficient marketing is another reason that many small businesses fail. Marketing can be an expensive endeavor, and many small business owners do not understand how to track conversion rates to tell what marketing techniques are having the most significant impact. You need a marketing plan that is constantly updated to keep a steady stream of new customers, as well as to stay in touch with your established customers. Overall, the mismanagement of the business is the primary cause of failure for small businesses. To ensure the success of your business, make sure you are keeping abreast of changes in your industry and changes in the marketplace. Seek help early, and often, when you encounter problems. Reaching out to a place like the Small Business Association or a mentor can help you manage your business effectively. Remember, what the statistics can’t tell you is the overwhelming feeling of pride you will have in running your business well.