Each year many new businesses are formed and start with dreams of becoming successful. However, 50% of all new businesses fail within their first five years, according to the Small Business Administration (SBA). Given these statistics and what business owners have at stake, it is important to understand the most common reasons why businesses fail and how to avoid these common pitfalls.
Business Practices to Avoid
Some of the problems encountered by new businesses in many different industries include:
· Taking on Too Much Start up Debt: many businesses take out loans that they quite simply can’t afford to repay based on their beginning monthly income. While it is important to start your business off the right way and in a professional manner, it is not necessary to borrow money to make your business what you wish for it to become in future years. Instead, consider borrowing a reasonable amount of money that you can repay comfortably when you are starting out.
· Expecting Profits to Cover Expenses too Soon: businesses tend to overestimate how successful their businesses will be within the first few months and years of business. It takes time to build a clientele and it often takes new businesses a year or more to turn a profit.
· Making Bad Decisions: there are a lot of decisions facing new businesses. If you chose the wrong location, the wrong product, or underestimate your competition then you may not be as profitable as you anticipate.
· Expanding too Quickly: if you don’t take the time to build your business at a reasonable pace then you may quickly become unable to pay the bills. Often, new businesses overestimate the space that they need to rent and the number of employees whom they need to hire.
· Acting on Determination and Motivation: new business owners are usually passionate about their new business ventures and that passion translates into determination that is good for business. However, in addition to passion and determination, new businesses need a solid business plan that is based on well reasoned estimations and principles.
· Choosing the Wrong Business Model: new businesses do not always consider, or make the right decisions, regarding business types. The choice can have a profound effect on an individual business owner’s liability for debts and business wrongdoing. Therefore, the different business types such as limited liability partnerships and corporations must be carefully considered.
· Failing to Collect Monies owed: there is a lot to think about when you open a new business. Some business owners do not follow up on outstanding invoices because they are uncomfortable doing so or are simply too overwhelmed with other business tasks. However, unpaid invoices represent money that is lost to the business and that cannot be used to pay expenses or be realized as profits.
What to Do When Something Goes Wrong
First, don’t panic. All businesses make one or more business decisions that are far from ideal and go on to learn from their mistakes, grow, and become profitable in the long term. While it is advisable to avoid as many bad business decisions as possible, especially when you are establishing your business, a bad decision need not be fatal to you’re the future of your business. The most important thing for you to do is to acknowledge your mistake and not to put your head in the sand in an attempt to pretend the error never occurred. You must address, and correct, the problem as soon as possible.
The information on this page is meant to provide a general overview of the law. The laws in your state and/or city may deviate significantly from those described here. If you have specific questions related to your situation you should speak with a local attorney.