Nearly 30 percent of all startups fail within their first year. While this may not seem all that remarkable, consider that half of all new businesses fail within their first three years, and 70 percent fail within their first five.
Why do the odds seem so stacked against new businesses? A deep dive into this question not only explains the failure phenomenon itself, it also reveals solutions to help small businesses avoid the pitfalls that can make them part of these sad statistics.
As a mentor for SCORE, a nonprofit association comprising volunteer business counselors, I have helped numerous small businesses discover why they fail and how owners can survive. Here are some of the most common issues I’ve encountered:
Funding a business usually requires investments from banks, investors and sometimes even friends and family. Once the business is up and running, it’s important that the flow of incoming and outgoing cash is managed properly.
The cycle of buying, selling and being paid by the customer needs to be timed correctly to ensure a positive cash flow. If vendors are being paid within 20 days, but clients have 90 days to pay the business, there will be a negative cash flow that will be hard to overcome.
Understanding the customers and knowing what their problems and needs are allows a business to develop products that have meaning and impact. If a business doesn’t listen, it could end up with an excess inventory of products that no one has any interest in buying.
By talking with customers and providing solutions to their problems, a business can create a lifelong customer base. While these customers may have initially needed just one product, building a strong customer-business relationship may mean more products, more referrals and more sales down the road.
When entering the marketplace, a new business most likely will face competition from all angles. Some new businesses try to face competition head-on or try to disrupt the market.
Don’t underestimate the competition, though. It could have a lower cost than the new business, allowing it to sell more products at a lower rate while still making a profit.
A new business, on the other hand, may struggle to even make a profit off their products due to inflated or unforeseen costs.
Develop a realistic business plan
An effective, well-thought-out business plan should be the backbone of your startup. At its root, I believe a good plan should begin with identifying the mission, vision and values of the business. It should properly define the target market and its segments, while also providing an unbiased analysis of the competition.
The marketing mix is a crucial tool to implement into a business plan, as well. It is most commonly known as the four P’s of marketing —price, product, promotion and place — and can help set a realistic sales forecast and operating plan.
Be sure to execute the plan. If one of the core values is mutual respect, ensure the business and its employees are living by it.
If your small business is struggling to “stay alive,” SCORE is here to help with free mentoring services for new and existing companies. Reach out to a SCORE mentor for guidance and get started right away on developing a plan for success.
• Kevin St. Cyr, a SCORE mentor, is senior vice president of Murphy McCormack Capital Advisors.