By Steve Feld:
I don’t think we should correlate closing a business, with a failing business. Regardless of what you have heard, or who you believe, that when you start a business, there is a good chance that you will fail. Your job as an entrepreneur, is to maximize your chances to succeed in business. While we hear many inconsistent numbers on what percentage of businesses fail, you can do a lot to prevent your own business from failing.
According to Bloomberg, 8 out of 10 entrepreneurs who start a business will fail within the first 18 months. That’s a whopping 80% crash and burn rate!
What can we learn from the colossal amount of failure with small business that we can apply to our own business aspirations?
Clearly, there are countless number of reasons, why a business fails. A few reasons always remain at the top, and I will only highlight the top 5 reasons.
- Cash flow: Hands down this is probably the number one reason why a new business (and many ongoing businesses) fail. Score mentors usually state that you should have a minimum of 2 to 3 times of operating capital in the bank, or have access to easy money before you start your business. This includes all your fixed and variable expense, YOUR salary, etc. If you believe your estimated sales will be $50,000 and expenses are $75,000 for your first year in business, then you should have at least $150,000 to $225,000 in the bank. What if your sales were less than estimated, and your expenses are more? Be prepared.
- Lack of demand: I hear many soon to be entrepreneurs that have an idea for a business, but it so unique, so specialized their entire market for the world is so small they could never make a business out of that idea. Business owners need to do a lot of due-diligence and market research to make sure their product or service has a demand that will drive sales.
- Staffing: This is the killer of many businesses no matter where they are in their life cycle. Your staff can either take your business to the next level or they can sink you way faster than the Titanic hitting an ice berg. If you want to build a successful business, hire great people, develop them, support them, listen to them, do not micromanage them to death.
- No unique selling propositions: What makes you different? Unique? Why should anyone buy from you versus the next business? Just go to any networking group and I bet you will find at least 20% of the attendees are SEO/Web developers/Internet self-proclaimed gurus. What sets each of them apart from each other? Knowing what sets you apart from others in your industry is key. Having something unique, special, targeted will allow you to find your unique selling proposition.
- Poor management: Going into business for yourself, you will need to learn and practice being a great manager/leader. Many new business owners make bad business decisions, hire the wrong people, take their eye of their business goals, go outside the realm of their business and it confuses people. Stay focused on what your goal of your business and what you want to build. Ask other business owners in your industry for advice and help if needed. Know your numbers.
Here are just a few statistics to realize how many U.S. businesses SURVIVE.
According to the Bureau of Labor Statics, the survival rate businesses looks like:
- About 80% (four-fifths) of businesses with employees will survive their first year in business.
- About 66%(two-thirds) of businesses with employees will survive their second year in business.
- About 50% (one-half) of businesses with employees will survive their fifth year in business.
- About 30% (one-third) of businesses will survive their 10th year in business.
What you really need to know is that:
- About 20% of small businesses fail in their first year.
- About 50% of small businesses fail by their fifth year.
These rates are consistent over time. Suggesting that year-over-year economic factors, surprisingly, doesn’t have much of an impact, on how many U.S. small businesses survive
The takeaway here is, that you can pretty much bet on an 80%, 66%, 50%, and 30% survival rate across 1, 2, 5, and 10 years in business—no matter the year.
It’s important to note that this reflects all businesses in the private sector. While the overall survival rates for small businesses surprisingly doesn’t vary much, the facts look a little different when you look at business failure industry by industry.
Before you start a business consider the reasons businesses fail. Begin by preparing to start a long-term successful business. Keep these simple items in mind when starting your business:
- Have access to capital
- Market research
- Find out why you are unique
- Get help - which is where SCORE comes in. Click here to setup a meeting for a free business consult with a SCORE mentor.