A large majority of small businesses fail within their first few years. With such intimidating failure rates, just how can you breathe life back into an under performing small business?
According to statistics compiled by the US Small Business Administration, 70 per cent of small businesses will survive at least two years, yet only half of those will still be operating after five. While not as calamitous as some sources would have you believe, the numbers remain confronting, especially for those planning on starting a new business or struggling to keep theirs afloat.
Common downfalls of new businesses
When tackling the topic of businesses that fail, perhaps a good place to start is to understand why most businesses fail in the first place. Here are three of the most commonly cited reasons:
1. Lack of start-up capital
Ensuring you have the funds necessary to stay viable past the first few months, when business will be at its toughest, is extremely important. Secure the funding you think you’ll need and then double it. The basic idea here is that you will likely need more money than your initial calculations advised.
2. Lack of research
Too often businesses are founded on a seemingly great idea, but only in theory. No amount of hard work or business acumen can save you if there is no market for your product or service. The fundamental question you need to ask is whether there’s a place for you and your product – in terms of customers and competitors.
Founding a business on solid knowledge is therefore advisable. Business studies have found that business owners with previous work experience in the same industry as their new business will have higher success rates. It’s simple logic.
3. Lack of planning
Every business, no matter the size, will benefit from a proper business plan. A business plan will act as a compass and guide, something you can always refer back to. It should detail your business goals and needs. It should also lay out a thoughtful financial budget. From there you can plan out financial controls. A marketing strategy should also be considered.
How to save your business from going under
While prevention is always better than the cure, what happens if your business is slowly sinking as we speak? Here are a few tips to stop the rot:
- Stop and review – When you’ve come to this realization it’s time to fix the problem, not ignore it. A good place to start is to review your business plan. Essentially, you want to get back to basics and remember why you started the business to begin with. From here you can tinker with your offering to make it more appealing, or even look into other potential revenue streams.
- Secure funding – If the only problem you have is a momentary lack of funds, and you have a decent credit rating, speak to your bank about a business loan. This is where your business plan comes in handy, as they will certainly require a solid one. But before borrowing any money, make sure you’re not just prolonging what is the inevitable demise of your business. You may also consider finding a business partner to share the costs and secure more funds.
- Cut expenses, reduce debt – This may seem obvious, but there are always ways to cut costs – you just have to make sure you’ve checked every possibility. Consider moving to smaller premises, renting out equipment or canceling the cleaning services. There is also the option to lay off staff whose roles have become redundant.
- Know when to call it quits – Most successful businesses are formed off the back of a number of previous failures. If you find your business on its last legs, sometimes walking away is the best move. According to a Harvard Business School Working Paper titled Performance Persistence in Entrepreneurship, first-time entrepreneurs have an 18% chance of succeeding, while entrepreneurs who previously failed have a 20% chance. The numbers aren’t earth-shattering, but it does give hope to those who have failed.
- Seek help – The best move for an underperforming company is to seek professional business advice. If you can’t afford a financial consultant there are always other options. For example, your local chamber of commerce should offer advice or even mentorships.
Starting a new business can be a difficult process for the first few years. However, by familiarizing yourself with the common mistakes small businesses make, and tips on how to prevent your company from going under in its formative years, you could be well on your way to entrepreneurial success.