You’ve probably heard of this chilling stat: 8 in every 10 small businesses fail within two years.
Well, that was back in 2013. It’s 2019 and this failure rate has gone down, but business failure is still a prevalent issue. According to the most recent surveys, about 50 percent of new businesses don’t make it past the five-year mark.
In a country with the world’s biggest economy, a land renown for its opportunities, why are there so many failing companies?
In this article, we’re exploring the main forces that are driving many businesses out of the market. Keep reading!
1. A Lack of Market Demand
Every year, American consumers spend trillions of dollars. In the first quarter of 2019 alone, they spent a whopping $14.24 trillion. With such spending, any aspiring entrepreneur would think their product or service will automatically get buyers.
How wrong! Turns out a lack of market demand is one of the biggest reasons so many companies are crashing out of business.
This means a high number of entrepreneurs are starting businesses either without doing sufficient and conclusive market research or they’re assuming the market will love their products or services.
The good news is this is an easy problem to avoid.
Before bringing any product or service to market, ensure you have an intricate understanding of consumer demand. You can even pay an experienced market research firm to establish whether your product will carve out a market for itself.
2. Running Out of Capital
65 percent of entrepreneurs have admitted to not being sure they had adequate capital when starting up their businesses. If you’re nursing the same feeling, your business is probably going to run out of money and fail.
The question is: why would anyone start a business when they don’t have enough capital?
First, the vast majority of businesses in the U.S. are small businesses. These don’t require a boatload of money to start, meaning their owners don’t have much to lose should the venture fail. In other words, it’s a risk they’re willing to take.
Second, some entrepreneurs underestimate how much they need to start up the businesses and keep it running until it’s sustainably profitable. Others work on the assumption that the business will start turning a profit as soon as it opens its doors to consumers.
Capital is the lifeblood of any business. Never ever go into business without adequate capital at hand. In fact, you have to draw a business plan that fleshes out your capital requirements and income projections before you start any business.
It’s also important to exercise financial prudence.
Most of the businesses that run out of capital don’t do so simply because they’re spending the money on necessary operations. They run out of cash because the people at the helm spend it on things that add little value to the business. Think things like purchasing fancy office furniture and appliances.
As a side note, it’s worth noting business leaders can purchase directors and officers liability insurance to protect themselves against claims of wrongful acts – like financial misappropriation – while in office.
3. Stiff Competition
When competition in the market is too strong, the weakest businesses (often the small ones) have little or no chance of survival.
The worst bit is there will always be competition in any market. Even if you’re launching a business that will carve out a whole new industry (the same way Uber did with the online taxi-hailing industry) soon enough competitors will crop up (like Lyft) and even beat you at your own game.
There are a couple of ways to handle this competition problem.
Before starting a business, evaluate the level of competition in the industry. If there are large companies with huge chunks of the market share, determine whether the remaining share is worthwhile. Sometimes it’s better to stay out of an industry than go all in and get crushed.
And if you believe the market isn’t too competitive, strive to create a standout product. Offer a unique value proposition. This will give you a good chance of being a strong competitor in the market.
4. Assembling a Bad Team
Once a small business starts growing, the owner must start bringing in more people on board. Unfortunately, most owners end up assembling a team that isn’t up for the job. Businesses that don’t have the right team behind it are more likely to fail.
From the outside looking in, hiring seems an easy task. Just advertise a position, review applications, narrow down to a couple of candidates, conduct interviews, and make your pick, right?
Well, not quite. Hiring the right people is much more than picking those who meet your professional qualification and experience requirements. You also need to consider whether they are a good cultural fit for your company.
If you’ve got no recruitment experience, it’s advisable to outsource the function to a recruiting agency that specializes in your industry. Yes, you’ll pay for this service, but it’s the best way to ensure your company gets the right talent. Plus, the right team will help push your company to greater heights.
You Can Learn from the Mistakes of Failing Companies
If you’re an aspiring entrepreneur, the high number of failing companies can discourage you from pursuing your dream. While some causes of business failure are beyond control, most involve poor decision-making on the owner’s part. You can learn from the mistakes of these companies and use the knowledge to enhance your business’ survival chances.
All the best and keep reading our blog for more business tips and insights.