Top 3 Reasons Why Businesses Fail in the First Few Months
Many of the reasons why small businesses collapse are very similar in many countries. It can be explained by the fact that rookie entrepreneurs make fundamental mistakes in their approach to business management. In this article, you can get acquainted with the root causes of why a small enterprise might fail.
Keep these business landmines in mind when reviewing the performance of your business and adjusting the strategy. Use essay writing service cheap and save your time and money for preparing a successful business.
So, let’s consider three main types of general mistakes related to management, finances, and business overall.
- 1. Strategic Mistakes
This type of missteps includes wrong decisions made in the medium to long–term, meaning those that determine the nature and direction of the development of your business. Any mistake at this stage can have severe consequences because such solutions are structural by nature, and it would not be easy to change or correct them.
Misunderstanding of Marketing Basics
The fundamental principle of your strategy and marketing should be a focus on consumers, and not on your goods or services. If you skillfully use the essential elements of marketing, you can avoid the three most frequent mistakes that can lead to the collapse of a company.
The first one is the lack of demand for your product because your company is oriented towards solving internal problems. You cannot force customers to buy your product — they have to need it.
Secondly, pay attention to the minimum rate of return immediately after starting so that consumers come to you and not your competition. A decision to raise it can expand your number of sales, but low profits will not give you the necessary funds for further development.
Finally, the third point is the incorrect positioning of the company. It is among the most severe mistakes that can jeopardize your venture even before you have a chance to get it on its feet.
Over–Reliance on Other Companies
Your company should not substantially depend on a third–party organization. This kind of reliance ties your business to someone else’s success or failure. For example, you can order an important project from one company, and, for some reason, it is not able to cope with it. Such a bond may occur in relation to a major customer, a material supplier, a subcontractor, or a sole distributor of your product.
If you notice this kind of dependence forming, consider what will happen if your connection breaks up. It can happen because of the termination of your partner’s activity, market changes, or if that company suddenly starts to pressure you in an attempt to get more favorable terms. It is better to secure some fallback options and try to eliminate such a dependence on others.
Absence of Long–Term Plans
Reality requires the business owner to plan ahead. Looking at the long–term, you can foresee the needs of your enterprise and select a suitable strategy, which would guarantee the needed resources. Also, planning is essential to achieve the ultimate goals that you set for your business.
Without forward–looking planning, any changes can negatively affect your business. Such changes can be of different natures. When planning for the future, try to anticipate events and work out backup solutions. The more chaotic the circumstances are, the more vital the strategy is.
- 2. Financial Activity Mistakes
Business owners are often so preoccupied with their current affairs that financial management becomes a secondary concern for them. Unfortunately, if your company is faced with financial problems, it can affect all parts of your business. Maybe, you lack money to pay your staff or to purchase raw materials. As soon as such difficulties begin, the venture has every chance to close down. Four main types of mistakes can be pinpointed in the organization of finances, and you should be aware of them.
Mistakes in Managing Cash Flow
Many businesses fail due to improper management of the cash flow. However, such errors can also appear in other financial facets of your company. A cash flow calculation can show if your business can get enough money to take care of your planned expenses. If your funds are not enough, then you have an opportunity to take the necessary measures to improve the situation and prevent further damage.
When planning cash flows, you should not be over–optimistic regarding sales revenue and production expenses. The lifeblood of a business is money, and you need to always know how much is required and where to get it. Without such planning, your company might not be able to continue, and you will be faced with its termination.
Too Much Borrowed Funds
Business financing can be carried out using direct investments and credits. Typically, funding comes from both sources. If a company takes a bank loan, it has to pay interest. If the share of borrowed funds in relation to equity is too high, a large part of the company’s profit is going to be deducted to pay for interest. As a result, you would not be able to cover the overhead costs, like rent and wages.
If company owners are not aware of the finances of their businesses, it is hard to expect them to make the right decisions. Small firms often crash only because their managers forget to enter data into accounting books regularly, or their bookkeeping gets too complicated or inconvenient. Reliable accounting should be implemented from the very beginning and improved as the business develops.
Objective data is needed to make managerial decisions. Without this information, it is impossible to count on sound choices. You have to set up an accounting system that would guarantee the safekeeping of information you may need at any time.
Misuse of Company’s Funds
Some companies fail because their owners do not control the flow of funds. Overhead expenses have to be carefully monitored, and their necessity and aptness should be checked. A strict inventory of materials and goods should also be tracked. After launching a business, many entrepreneurs begin to spend too much and buy luxury stuff on the company’s money. Very often, these extra purchases are useless and even detrimental for the venture.
- 3. General Business Mistakes
Company management requires making decisions every day; these choices change the state of your business immediately and in the long–term. When problem–solving, you can make mistakes that can quickly lead to failure.
Lack of Market Knowledge
Before launching your business, you should thoroughly study the market in which you are going to operate. Analyze all of the moving parts to make sure that they will work, and market testing will give you an idea of how potential consumers respond to your product.
One of the critical factors in business is experience. If the company owner is inexperienced, his or her chances of failing increase. All the more reason to conduct thorough research of the given market.
It can happen even to prosperous and booming enterprises. You might lose sight of the cash flow when the expansion of your business requires additional investments in new areas, increased funds for salaries, more raw materials, modern equipment, and new cars. All this can soak up your cash.
After that, you will realize that your productive business is expected to fail unless you find additional funds or get a loan. To avoid such a hazard, you need to come up with a tactic for the future with the calculation of available finances and keep an eye out for the signs of overproduction. If you suddenly see that you might need extra money, you will at least have time to take the necessary countermeasures.
It is the exact opposite of the previous case when the cash proceeds do not cover the overhead costs. Your business becomes bloodless since all of the money gets used up to pay for your invoices. You can’t be reluctant in such a situation. You have to either urgently close the company and thereby save the remaining cash, or carefully analyze your strategy and try to increase your returns sharply. You will also have to review overhead costs and reduce them for saving money.
In addition to the mentioned above cases that may lead to business failure, it is fair to bring up other issues related to time management, staff, and unexpected circumstances. Doing business is hard work, and yours is by no means a guaranteed success. However, it is better to learn from the mistakes of others and avoid trouble for yourself.