5 hidden causes that lead to business failure in the first year|How to avoid business failures in the 1st year?

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Written By Voitto Insights

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The US Bureau of Labor Statistics ( BLS ) data suggests that 20% of new businesses fail in the first 2 years, 45% during the first 5 years and 65% during the first 10 years. After 15 years only 25% would likely survive. Now, what causes new businesses to fail so early? What can one do to avoid such failures?

Avoid chaos in business

Below are few points, which I feel are critical and should be given a deep thought.

1. Lack of business and fund planning

Before launching any business it is extremely important to plan steps to be taken. Proper market research is the key to identifying a demand gap. However, many miss or don’t care to give adequate time to this important activity before commencing any business.

Business planning needs to be done to the minutest details. One should prepare a projections sheet and have conservative estimates regarding expected sales. Manpower cost should be built in line with expected revenues. Similarly other high capital expenditures should follow the revenue trend. Rather focus on expenses to build brand awareness ( e.g. marketing). Many a times heavy capital expense does not leave adequate room for promotion expenses. There is simply no point in making heavy capital expenditure on the first day itself. It will simply add more pressure to your finances.

Any business demands adequate time to establish and blossom. The common mistake made often is to expect immediate results. As a result most don’t plan for adequate cash requirement. Budgets are not made nor adhered to. Most startups wither due to the drying up of liquidity. Most businesses should see industry trends and be prepared to sustain for the desired period. One simply needs to inquire in the market and plan liquidity for more than the period advised.

2. Not having the right team

Having the right team in the initial phase can help build a solid foundation for the business. Building a right team need not be an expensive exercise. Nor is there a burning requirement to have many years of experience amongst team members. In fact all of these may be detriments, as a startup demands selfless work. One may need to do all kinds of chores during the initial phase. Managing multiple responsibilities is one of them.

I remember myself opening and closing the doors during the initial days of the organization where I work. It was only possible as I was young with a clean slate. I don’t remember any of the experienced staff sharing this responsibility. Whenever they did, it was made known to everyone. Hence, initially one needs to have young staff, who will not tire itself working day and night to make the business a success. Of course for critical areas, one would need to hire experienced staff. Give a good thought on this aspect as manpower cost is one of the highest contributors to the fixed expenses. Use freelancers, wherever feasible.

3. Loosing product focus

Most of the times the promoters feel that their product is the best and will be accepted well in the market. They fail to do a pilot survey of the product or course correct midway. Later everyone wonders why sales are not picking up. It is the same for a service offering.

Thus it is imperative to test the products in the market and get a feel of adoption readiness. One can run a small campaign within a local area and get a decent response. This can be done cheaply but the insights gained are usually invaluable. Go to the market often !

4. Not tracking and controlling the expenses

Liquidity (Cash) is the life blood of any business. In the excitement of starting a business, many make the mistake of making it grand in the beginning itself. They tend to indulge in many activities, which only serve as distractions. It should be the opposite, where a laser sharp focus is required.

Before commencing any business, one should devote adequate time in learning the basics of financial statements. Specially the cash flow statement. There are numerous resources available on the internet. MOOC courses are awesome.

5. Inability to learn from mistakes

It is often too late to rectify mistakes, unless one keeps a tab periodically and course corrects on time. Many businesses in the initial stages make the mistake of not looking back at the decisions taken and then evaluating the results. The only view is external at this stage. Where the focus is on having more funds, reaching out to more geographies, without checking for internal lacunae.

A promoter should be ever watchful and keep visiting the markets to observe first hand. Many business leaders interact directly with their clients as then they are able to add immense value.

Be mindful in business

6. Concluding remarks

Running a business can be challenging at times. However, it should not bog one down. It is a case of learning to prioritize. Often times 20% of solutions contribute to 80% of the issues. Thinking hard and simple is the key. Don’t complicate things and have a logical view to everything. You will be surprised that running a business is not that difficult after all. Lastly don’t forget to imagine big and think aloud.

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