It's a daunting figure.
Traditionally it has been said that 80 percent of new and start up businesses fail in their first few years of operation.
However, for those who want to start a business, new statistics from the Small Business Administration show that if one starts a business they do have a 50/50 chance of survival for five years. Still that is not very good for a project that someone might have put their lifeblood into.
Why is that? Why do half the people who have a good idea for a business and the enthusiasm to back it, fall on their face when putting together and extending the life of their endeavor?
Business development experts can give many reasons. The lists one can find run from four to 20 reasons why new businesses often fail. But there are a few key points why they don't succeed, and knowing those reasons can save a business from falling down before it is really propped up. Some of these reasons are philosophical, while others are very hard concrete, the place where reality sets in.
First and foremost a person must evaluate why they want to start their own business. If it is to make a lot of money fast, or to have no boss to tell them what to do, then they are operating on false pretenses. If it is to have more free time, they are also in a dream world.
Most start up businesses do not make a lot of money to begin with. Most businesses have to spend more money to survive the first few years than they make during that same period of time. That's where capitalization comes in; another factor in failure.
Not having a direct boss can be a good thing for some people, but start up business people who succeed know that they really do have many bosses; their customers. Sometimes the headstrong power it takes to start a new business gets in the way of what customers really want. Start ups are so convinced that they know what people want, that they ignore their customers ideas or requests.
Starting up a new business also takes a lot of time. There are no 9 to 5 jobs in the start up business world. For many it is more like 5 a.m. to 10 p.m. and often seven days a week, particularly in the beginning.
For those that think their work for someone else consumes too much of their life, then they should consider that when they work for themselves there will be no free time. Business start ups take the owners mind on a trip down a long river, one that runs through their heads when they go to the movies, to a baseball game or even laying in bed at night. A self owned business is never ending.
Businesses also fail because of a lack of expertise in the business that is being started. It sounds funny, but there are people who start businesses concerning products or services they know little about. Often they have worked in that business they want to start, and doing that job well they believe that they can run a business, on their own, doing the same thing.
But the complexity of even a simple business, where it takes skills that include everything from sales to service, can be daunting when someone who hasn't done it is faced with the reality of competing in the world.
In the business world, sales drive an endeavor. A person may be a master gadget maker or service provider in a field, but without a good sales program and someone to drive it, maintain it and caress it, the business will fail. Low sales means a business will not exist long, unless the pool of money backing it is large.
When it comes to money often people borrow money to start a business. That is fine if a good business plan is devised. Most lending institutions that are giving out money to start businesses require a business plan to even consider a loan. But often people who are starting businesses borrow money in other ways; personal loans, home equity loans or even from relatives or friends. Improper credit arrangements can be a main reason for a business failure.
A business plan will detail how all monies should be used. Many businesses start out under capitalized, and then go downhill from there because the owner
How money is used can also be a problem. Sometimes business startups invest their money in the wrong fixed assets, often in things they don't really need. Or they buy new when they can get something that does the same job, used. A business owner should go through the ledger of expenses each month, or even more often, and look at the things that money is being spent on. Then they should be very critical about what should be spent in the next review period. Take out things that are not absolutely needed.
In a new business the business plan is all important, not only to get the money for start up, but for the operation. Without goals, and a strategic and tactical plan on how to get to those goals, usually businesses get side tracked. And yet many people who have start up spirit fail to generate a plan. Some feel they are smart enough to work their dream without a plan; others fear it will lock them in to doing things they really hate doing in the business. But that is the key. Activities performed in a business must be the proper activity. For example, one who likes the manufacturing process in a certain small business, may hate hawking the wares of the enterprise on the street. Therefore they concentrate their time the creation process and pay as little attention as possible to the sales process. So unless they either have a partner who likes doing sales or they hire someone to do it, the business is generally doomed to failure.
There is also another point about activity in business. Sometimes start up business owners get involved in the day to day activities of running a business so much that they forget about the big picture. Getting hung up on and putting too much time into certain aspects of the business can easily lead to failure because other parts get neglected. A good, detailed business plan that is followed religiously can help avoid this pitfall.
Once the business is going there are two problems associated with growth that can get out of control. One is that if money comes in fast, the use of that money improperly can create big problems down the road. Businesses have costs and they have profit. In a new business, almost all profit needs to be reinvested in the business or set aside for not so successful days. New business owners, when they get a big wad of cash, tend to want to celebrate and often use more than the profits doing so. This can mean a later death for the business.
The other is success. Success must be managed, just as a poor showing does. Extreme fast growth can put a company out of business as fast as poor sales. Keeping up with growth, particularly in providing service to customers and hiring new employees to take care of the growth can nail a company to the wall.
The start up of a business can be a joyous affair. Or it can be a dubious adventure. The pitfalls are there, and good business advice can help the owner to avoid them.