Reasons Small Businesses Fail

The Top 5 Pitfalls of Startups

Starting a new business is fun and exciting. Being your own boss brings a sense of freedom. However, startups come with challenges. About 70% of businesses face potential failure and most of these within their first 25 months. The No. 1 reason for failure is CASHFLOW. However, cash-flow pitfalls can be avoided with proper planning.

Cashflow issues initially plague some business types more than others. For example, in industries that provide services, such as electrical, plumbing, HVAC, marketing, engineering, architecture, tax, and accounting, the primary costs are labor. In these industries, your first challenge is acquiring clients. In industries that sell a product, finding seed capital to buy raw materials and, in some cases, equipment will be an initial challenge.

Here are the top reasons startups fail:

Lack of Planning

Many entrepreneurs fail to plan adequately. According to a survey, in retrospect, barely half of the entrepreneurs had planned adequately. A good business plan includes your vision for the future, the problem you will solve, and how you will achieve success. It also should include a detailed budget with costs, revenue predictions, and cash-flow forecasts. If you need seed capital, the plan will include an estimate of how much capital you need and how you will raise it; for example, do you seek to borrow or receive from investors or institutions, like banks?

In some industries, a sales cycle could be as long as a year. Winning the first contract can take time. The business plan should make provisions for this. One way to alleviate the pressure is to save at least six months to a year of living expenses before you quit your job to start your company.

Lack of Sales and Marketing

Many entrepreneurs are good at making the product or providing the service. They are not necessarily as good at marketing and actively selling it. Yet, sales and marketing are critical to business success. Unless the business has customers, it can’t make money no matter how good the product or service is. Successful entrepreneurs develop the ability to close new business. This strategy includes developing a website, implementing a customer relationship management (CRM) tool, and content creation. Finding a trusted partner to assist you in executing your vision is key to getting new business and growing. There is a difference in doing it all vs. giving it your all; delegate what you are not an expert in.

Lack of Team or Resources

When founding a business, giving one’s all is important. However, giving one’s all is different from doing everything yourself. To succeed, entrepreneurs learn to delegate and effectively use outside resources until they are ready to hire an internal team. Utilize their expertise and skills to propel the organization in the right direction. As an owner, if you fail to do this, you risk burnout, and the business will fail.

Barrier to Entry

In a survey, 42% of owners of failed businesses cite lack of market demand for their product or service as a major reason for failure. These owners failed to fully validate their business idea by asking potential customers if they’d actually pay for the product, and how much they would pay. Perhaps they also misjudged the size of the market or failed to provide value in their product or service that differentiated them from the competition. Successful entrepreneurs fully understand what differentiates them from their competitors and know that customers will choose them based on this differentiating factor.

Failure to Document Processes

Consistently providing a quality product or service is essential to building a successful brand and business. The reason chain restaurants are successful is that they have a recipe and consistently deliver the same product across several locations. Many entrepreneurs fail to develop good processes and document them, and this lack of planning and documentation leads to sporadic quality. In addition, if your goal is to eventually exit, then documentation is going to be vital in that process. To be successful, develop a process and a checklist to ensure consistency and save those documents as living and breathing documents.


Key Actions to Take

Startup owners can improve their success odds with a few key actions.

  1. Find a mentor. Seek their advice and listen to it.
  2. Outsource non-core business tasks, such as accounting, payroll, and human resources, to save your energy for selling, marketing, and networking; revenue-generating tasks should be your focus.
  3. Define your marketing strategy. A sound marketing strategy includes developing personas, a website, using sound SEO principles, and providing content that will draw your target customer. If you’re not well versed in SEO strategy, consider outsourcing this, we use Calibrate Brands.
  4. Stick to core offerings. Having a few loss-leaders in the beginning is OK and part of the learning process. But overall, sticking with what you know is the best strategy. Saying “no” to business that is outside your core is OK.
  5. Be sure you understand your financial statements. The balance sheet describes the health and wealth of your company, the income statement is your financial performance, and the cash-flow statement lets you know cash position changes. All three are important to planning and growing your small business.
  6. Be purposeful. Make a plan and commit it to paper. Review it with your trusted advisor for accountability or to shine light on any blind spots.

Startup Services

Virtuous Partners provides business optimization through financial analysis. We provide planning tools, financial expertise, accounting/bookkeeping, and payroll services so that you can focus on your core business. We also can ensure you establish clear, sound financial practices from the beginning. We can help you understand where you stand relative to other companies in your niche.

We also provide marketing, sales, and operational support. We understand SEO, e-mail marketing, CRM, and content marketing strategies and can give you a solid start toward acquiring customers. We also can suggest operational changes to improve quality and save you money. Let’s work together. Contact us today.

Sarah Lieb
Sarah is a highly driven strategic financial partner and leader. Working in various industries including construction, marketing, education (digital/e-learning), technology, and manufacturing with multi-billion-dollar revenues. Working with several private equity groups to manage complex M&A transactions in the U.S. and U.K.

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