Top Five Reasons Why New Businesses Fail Within the First Year

This is a guest post by Jenna Smith. You can click here for more information on submitting guest posts.

The truth about starting a small business isn’t pretty.

Roughly half of small business startups will close their doors within the first year to five years of operation.

This isn’t exactly inspirational, but at least it paints an honest portrait for anyone thinking about starting their own enterprise.

Yet in order to see success you’re going to have to do more than factor this truth into your thinking. You’re going to have to avoid the common pitfalls most entrepreneurs inevitably fall into.

The Most Common Pitfalls for New Businesses

So what are they? While you may be convinced that a startup’s worst enemy comes in the form of workers compensation lawyers, the real threats are more likely to be found within the business itself.

In addition, outside factors – which are for the most part out of your control — are often the main contributors of a small business finding failure instead of success.

Here are the Top Five Reasons why new businesses fail in their first year:

1. Too Much Invested in Fixed Assets

Part of the reason so many restaurants and other strictly brick and mortar businesses fail right out of the starting gate is that they have to spend so much of their starting funds on machinery and property.

A smart small business employs the use of fixed assets sparingly and gives themselves some elasticity in terms of further investment spending.

2. Lack of Available Credit

New businesses cannot afford to underestimate the importance of having reliable access to credit.

While many aspiring entrepreneurs may associate use of credit with inevitable failure, the intelligent use of borrowing for the sake of payroll and other immediate and necessary expenses is almost essential in today’s fast paced business world.

3. Frivolous Use of Funds

Apart from going against the grain of your business loan agreement’s fine print, choosing to use the money set aside for growing your enterprise for use in personal matters is simply an act of self-sabotage.

Even if it seems like an innocent act at the time, the use of business funds will likely be uncovered later, either through an audit or when unexpected expenses come up later and you have no funds available.

4. Rapid Growth

As counter intuitive as it sounds, too much success in too short a time can wind up crippling a new company.

The lack of experience combined with the need to make big decisions quickly can result in a halting of momentum. If business slows after huge investments have been made in the expectation of boom times, the consequences can kill a small company.

5. There Is No Market Or the Market Changes

All the planning and ingenious advertising in the world won’t change the fact that your market isn’t there in the first place. Whether through a change in the overall economy or the failure on the part of the entrepreneur to recognize the lack of a market to begin with, low-to-no sales soon equals no business.

Those serious about starting a small business need to swallow the cold hard facts about their chances of success.

More importantly, they need to take the time to avoid the snags that catch so many startups off guard. While creating your own enterprise will always be a risky business, preparation is critical to seeing the most success possible.

Jenna SmithJenna Smith lives in St. Louis, Missouri. When she isn’t writing, usually about law or business, you can find her cruising the paths in Forrest Park on her bicycle.

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Photo credit: Microsoft Office Online

 

 

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