It’s commonly heard that a business that started just a few months ago has already folded. It’s sad when promising businesses fail, but according to the Small Business Administration, census data indicates that more than 25 percent of new businesses don’t survive their first year, and more than half of them will fail within five years. There are many reasons that new businesses don’t make it, but here are the four most common:
1. Lack of market for the product
Many startups bring a product or service to market without doing the proper research. They may have great ideas, but they don’t understand the needs and preferences of their potential customers. Without a thorough market study, entrepreneurs are unaware of market gaps, their competition and how to cater to their customer niche. They end up trying to sell a product or service in a market that may be oversaturated or simply not interested.
2. Poor management
Management is the backbone of any business, and weak strategies, ineffective teams and poor results are the hallmarks of poor management. Unrealistic goals, poor planning and the inability to communicate with employees result in production delays, low-quality products and poor customer service. Eventually, customers take their business somewhere else.
3. Running out of cash
A business needs a stable cash flow; it needs to bring in more money than it spends. Most startups fail is because they can’t balance the two. For instance, a startup might decide to supply its products or services on credit in an effort to attract new customers. This can be dangerous for startups because the delay in payment means there isn’t enough cash coming in to cover the cost of production.
4. Being overly optimistic
Many entrepreneurs start their businesses thinking it will be easy to sell their products, gain a significant market share and see profits. They concentrate on building their websites and developing their products instead of finding their markets and outdoing their competitors. It’s not always easy for new businesses to gain customers’ trust, and acquiring new customers can sometimes be more expensive than their lifetime value to the business.
The Bottom Line
Knowing the most common reasons for failure can help entrepreneurs avoid these mistakes and succeed. Thorough market research, especially an analysis of the competition, is invaluable for preventing many of the problems that new businesses face. It also helps to have strong management to identify and resolve the problems that affect product quality, customer service and cash flow. Startups with management teams that understand the market, the competition and the true cost of production will have a greater chance of surviving the critical first year and beyond.
About Universal Funding
Whether your business is thriving and you can’t keep up, or you are waiting on clients to pay their invoices, Universal Funding can help your growing company. Call us at 855.382.6153 or complete our rate form today to learn more about invoice factoring and how it can improve your company’s cash flow.
Universal Funding is a private funding source that has funded thousands of businesses and more than $2 billion since 1998. We turn your accounts receivable into the funding you need through invoice factoring and can have capital in your hands in a matter of days.