There are a million and one unique reasons why businesses can and do fail. Thankfully for you, we aren’t going to drag you through the painful process of discussing them all here. Let’s narrow the scope to the most common. According to the SBA’s website the most detrimental pitfalls that really put the metaphorical nail in the coffin for majority of businesses can be narrowed down to eight mistakes. While reading through this article, these mistakes might seem somewhat intuitive to you, but an overwhelming amount of business owners (enough to the make the top eight mistakes list) overlook these simple yet crucial details.
Reason #1 = Lack of Experience
Yes, this statement is broad; allow us to elaborate. This can mean a lot of things— lack of experience with respect to the industry you’re servicing, or perhaps lack of experience in management, hiring, payroll and the list could go on and on. As an entrepreneur it’s important to be aware and not afraid to admit what you do well and what you need to outsource. Starting a business and expecting to perform exceptionally at all job functions is just plain unrealistic. Experience in essence is something that everyone can acquire, but the real question is- are you willing to gain it at the expense of your business?
Reason #2 = Insufficient Capital
Money. When you run out of it, the business ceases to exist. Cash flow is a term every entrepreneur should familiarize themselves with if they ever hope to be successful. You can have the most profitable business idea with the best laid out business plan, but if the business doesn’t have enough capital to meet financial obligations, it becomes just another failed business statistic. Be realistic and err on the side of modest with revenue projections, stick to your budget and over-estimate costs as surprises have a way of appearing when you least expect them.
Reason #3 = Poor location
We hear you, not every business needs a storefront location, but if your business does, this happens to be imperative. What determines the right location exactly? Survey the surroundings and consider such things as cost in relation to your budget, proximity to competitors and ensure there is even a market for your business in the area you choose. If you’re a mom and pop grocery store, it’s probably not the best decision to open up a location in a plaza with or near a Walmart.
Reason #4 = Poor Inventory Management
Have you ever heard of shrinkage? For those of you that are unfamiliar, it’s the expected reduction in inventory due to wastage and theft, both internal and external. The 2013 Volumatic Kount U.S. Retail Fraud Survey revealed that shrinkage costs American retailers roughly 54 Billion dollars in 2013 with the lion’s share of that stemming directly from internal theft. Aside from paying your staff, inventory is a company’s biggest expense and should be treated as such.
Reason #5 = Over-Investment in fixed assets
Fixed means exactly that— it doesn’t go away even if you are not producing at the levels you might have anticipated. It’s easy for a business owner to get caught up in the excitement of the business, but fail to have the practical foresight that purchasing long-term assets such as a building and equipment might not be sustainable over time. When the future of a business is uncertain, choosing more flexible, variable cost alternatives (such as an office at TechSpace) can provide extra cushion in the instance that reality deviates from expectations.
Reason #6 = Poor credit arrangement management
Consider the business entity and its credit as you would your own personal finances. This means taking on manageable debt and taking care of accounts payable to vendors in a timely manner. Businesses often times assume debt they can’t possibly sustain, or for that matter repay. When a business wants to expand, more often than not this means applying for a loan and if the business has established a history for untimely and inconsistent payments they become a higher risk to lending institutions. Developing bad credit for the business can directly hinder growth in the future and in this case end the business itself.
Reason #7 = Personal use of Business funds
Growth requires re-investment into the business. In the growing stages many business owners have invested a considerable amount of their own capital and are reliant on the business for their own livelihood. It can be tempting for business owners to dip in the business account to fund their personal expenditures. It is very difficult to be diligent about creating a divide between personal and business funds. From the start, it’s good business practice to create a business bank account and keep all finances separate. Another line that is regularly blurred for a business owner is how much and when to pay themselves? It’s easy to shift all the profit each month to a personal account, so setting a clear amount and a pay schedule for yourself as you would an employee can help avoid this circumstance.
Reason #8 = Unexpected growth
As ridiculous as the thought of “too many customers” might sound, too much growth can sink a business fast. It’s not the actual growth that is the scary part—it’s when businesses are unprepared for that growth where the breakdown occurs. For example, a cake shop with limited space and employees can produce only 100 cakes a day and is currently selling 75 cakes daily. Let’s say they take out some very effective ads that increase daily demand tomorrow to 200 cakes. The shop can’t reasonably sustain this demand overnight and will quite literally burst at the seams. Scenarios like this cause businesses to go under while simultaneously gaining a terrible reputation for follow-through.
In the unpredictable world of business there are many factors in our external and economic environment that are out of the control of today’s businesses owners, but fortunately for us the top eight fatal flaws are mistakes that proper planning and having preventative measures in place can avoid.