How to Understand Why New Business Fail


More than 50 percent of all new businesses fail within the first year of operation. Why? Here are nine major reasons:

1. Poor planning. Many people go into business unprepared. It is critical for any new business owner to develop a de­tailed business and marketing plan.

2. Insufficient capital. Money is the lifeline of any company. Without it no business can survive. You have to make a detailed budget of your company’s expenses before you start your business. Since it takes most businesses more than a year to realize a profit, it is important to have enough operating capital for at least the first year of business.

3. Poor or nonexistent market analysis. In order to compete in todays marketplace, you must know who your competi­tors are, where they are located, and what they offer their customers. In addition, you have to know who your cus­tomers will be and their likes and dislikes before you can develop a plan to sell your product to them. Proper mar­ket research is critical to the success of any small business.

4. Poor marketing and advertising. You must have a consis­tent and detailed month-to-month marketing plan to reach customers. Without effective marketing and advertising, a company cannot survive.

5. Poor-quality service or product. Today’s consumers de­mand high-quality products and services at the lowest prices. You cannot afford to have defects in your products or services. If you do, you won’t be in business for very long.

6. Poor financial and accounting record keeping. Not only does the law require you to keep business records, your accounting system is what gives you an accurate and con­stant measure of how well the company is doing. Whether you do the accounting yourself or hire an accountant, you must keep accurate financial records in order to survive in business.

7. Ineffective credit control. If you give customers too much time to pay for the goods they purchase, you may never collect the accounts. The result is a strain on your com­pany’s working capital. Setting up an open account credit policy makes it easier for customers to buy and pay on time. But you have to have a system to monitor your ac­counts receivable.

8. Inaccurate inventory control and theft. It is very expensive for a company to keep a large inventory of supplies. Busi­ness owners have to pay up front for inventory, and the longer the business goes without selling it, the more it can create a dangerous shortage of cash flow. Theft can also be a serious problem, and you need to develop a good theft-prevention policy.

9. Lack of awareness of market trends. The world you are go­ing to do business in is constantly changing, and so are consumers’ buying habits and preferences. Just because customers bought a certain product or service from you today doesn’t mean they will want to buy the same thing from you next week. Studies show that within five years of the time they were first put on the market, 80 percent of today’s products are either obsolete or changed in some way. Your customers will be constantly bombarded by new and different products and services every day. So you must keep current with changing market trends and what cus­tomers want, or your business will go elsewhere.

There are, of course, many other reasons why many businesses fail each year. But being aware of the most common reasons can help as you prepare to open your own business.

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About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.

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