5 Reasons New Businesses Fail

According to the U.S. Bureau of Labor Statistics, around half of all start-ups fail within their first five years. As a prospective entrepreneur, it’s vital to understand and protect yourself from the most common causes of those failures.

Starting a business requires careful preparation. A business’s success depends on understanding what problem it’s solving for its customers, how the business fits into the broader market and industry, and how it will grow and handle challenges. A good product isn’t enough to overcome poor planning. This is why a carefully constructed business plan is so important for new businesses.

The saying is that “you have to spend money to make money.” This is an unfortunate reality for new businesses, which almost always require spending before they can become profitable. This money may come from the owner’s pockets, loans or other sources of borrowed money, or investors. Regardless, many businesses start in the red and under pressure to earn money ASAP. As the business grows, expenses will likely increase as well. A new business needs to find the balance between expenses and income. If spending is at an unsustainable level, it will be almost impossible to keep the doors open.

Marketing is vital to a new business’s survival. Some new entrepreneurs focus entirely on their product or service, forgetting that a business can have the best product or service in the world, but no one will pay for it if they don’t know about it. It’s not enough to just get a business name out there—it needs to be in front of the right audience. Advertising your lawn care business to people in apartments, for example, is likely a waste of time and money.

New businesses need to be agile and adjust to unexpected customer demands or changes in the market. Sometimes the most careful research and thoughtful plans don’t translate into a successful reality. Did you anticipate that chocolate chip cookies would be your bestseller but, in reality, people keep asking about the lemonade? Maybe you should consider investing more in that area of your business and spending less on cookies. Not as much interest in your dog walking business in one neighborhood? Maybe you need to drive out further to try a different one. But a business cannot bend to every trend that comes up. A successful business balances the whims of an ever-shifting customer base with staying true to their plans and goals.

Almost all the common reasons businesses fail are also linked to poor leadership. At the end of the day, a new business relies on its leader or leaders to guide the way. If you’re opening a business all by yourself, that puts everything on your shoulders. You’ll need to work carefully with your budget and time. And a business with multiple people needs to ensure that everyone is utilizing their talents to their best abilities. A harsh or overly strict leadership team that scares away any prospective talent isn’t doing the business any favors, no matter how much experience or passion they have for the business.

Starting a new business requires taking on risk, but careful preparation can help you prepare for those risks and mitigate their damage as much as possible.