Business Failures

Question

Why do many new companies fail within a year of establishment?

Answer 1

As part of the planning stage, businesses should ensure there is enough adequate funding in the first year. The reality is that cash flow is the lifeblood of any business, and the failure to properly plan for both expected and unexpected expenses can quickly lead to disaster.

Below are a couple of things to consider:

1. Budget for a "worst-case scenario." Set aside at least 10-20% of your initial budget for unexpected costs or less than expected sales or revenue. Having access to emergency funds can help you ride out periods of low cash flow or unexpected setbacks.
2. Make sure your cash flow projections are as accurate as possible. Forecast your income and expenses for at least six months to a year but also consider seasonal fluctuations or slow periods. Having visibility into potential gaps in cash flow allows you to take proactive measures, whether it’s cutting costs or securing additional capital in advance.
3. Many new business owners focus too much on growth and scale, forgetting that it’s more important to be sustainable in the early stages. A profitable business is one that can reinvest earnings and reduce reliance on external funding. Until you’re turning a profit, it’s critical to be conservative with your spending and keep a close eye on how you allocate capital
4. Lastly the timing of capital raising efforts is critical. Whether you are relying on investors, loans, or credit cards, being in a position of desperation can lead to unfavorable terms or worse...losing control of your business. It is far better to raise capital when things are good and stable then on the verge of disaster.

Answer 2

There are many reasons for business failures. The most important is a lack of adequate planning. Regardless of how small or big you want your business to be, you should plan adequately for it to be successful. For example, for a retail business, location is important. Do a little research on the industry. Think about a unique selling point that your business has, that your competitor does not have.   This unique selling proposition(USP) can be a service you can provide your customers that will make your business different from others in the same industry.