Many new businesses out there are not successful. Many new companies fail within the first year or two of operations. Being new on the market is not always easy.
A new business is very likely to face many problems that must be dealt with immediately to prevent those problems from escalating and threatening the business survival which is the main business objective of start-up companies.
Even long-established businesses fail too, but the reasons why old companies fail might be slightly different – not written in this post.
A list of potential problems that new businesses face
There are many reasons why businesses, especially new businesses, fail. Success with a new business can never be guaranteed, and business managers know that very well. Let’s take a look at some of the most common reasons for new enterprises failing.
1. Inability to identify successful business opportunities.
Identifying successful business opportunities is one of the most important tasks of being a successful entrepreneur. Many people say that they ‘want to work for themselves’, ‘be their own boss’ and ‘earn a lot of money’. However, they are not able to make the leap into entrepreneurship successfully due to the fact that they are not able to clearly identify a market opportunity. Meaning, there is no sufficient demand for the good or service that they plan to sell in order to run the business profitably.
2. Poor planning and lack of business objectives.
The lack of a business plan with all basic elements, covering all business functions in details such as marketing, finance, human resources and production, as well as detailed forecasts of profit and loss, can cause eminent business failure. While having a detailed business plan is not always necessary to be successful in the long-term, having important things about your business written down, can give entrepreneurs essential focus in the short-term.
Also, owners of new businesses very often forget to set the aim for their business and business objectives that can lead the organization in the right direction. Therefore, the business lacks both the aim to strive for, for example, to become the biggest fast food restaurant in the country, and business objectives that help to achieve that aim.
3. Lack of finance.
Finding start-up capital is at the top of the list of problems for a new business, according to many entrepreneurs. New businesses often lack money needed to take advantage of the available business opportunities.
Once the entrepreneur has decided on the business idea, the next task is to raise the necessary start-up capital that will be used for the purchase of fixed assets such as land, buildings, machinery, equipment, etc.
However, most owners of new or small businesses do not have necessary credentials and trust to effectively secure funding from external sources of finance. Even if a new entrepreneur is able to borrow some money from family members and friends, the funds may not be sufficient. Also, in case of taking a bank loan, there will be relatively high interest charges which will affect future profits and the cash flow position of the business. Therefore, new business owners often have to use their own assets such as a house or a car as collateral (financial guarantee that the asset will be transferred to a lender in case a borrower fails to repay the loan).
4. Legalities & Other legal issues.
It is necessary for all businesses to comply with necessary laws and regulations. A new business must go through business registration procedures, follow labor laws and consumer protection laws, pay social insurance to cover all employees, obey copyright laws, comply with fire and safety regulations, and even purchase insurance for buildings and equipment.
The legal requirements of setting up a new business organization can be tedious, confusing, time consuming and very expensive. The amount of paperwork and bureaucracy required in order to start a new company can discourage even the most passionate entrepreneur. Any oversight in business activities could result in lawsuits – the business having to pay compensation or penalty fees. Hence, damaging already vulnerable cash flow position of a new business.
5. Poor management & Lack of leadership skills.
Many owners of new businesses may have excellent ideas for products, but they often lack the management skills and experience to run their business efficiently.
Most entrepreneurs have had some form of work experience from working full-time jobs, but many of them do not have any managerial skills. They may also lack leadership qualities that are so important to be a successful entrepreneur. For example, an entrepreneur opening a pizza restaurant may be an excellent chef, but may lack management skills in running his or her restaurant. Specifically, new business owners may lack important experience in cash handling and cash management, planning and coordinating, decision-making and execution, communicating, marketing, promotion and selling, hiring the right staff, etc. Sadly, enthusiasm, a bubbly personality and hard work may not be sufficient to ensure commercial success.
All of the above can lead to poor levels of customer service, low employee motivation, high labor turnover and messy organizational structure. Hence, unnecessary increase in costs.
Some entrepreneurs learn these managerial skills very quickly once the business is up and running, while some other entrepreneurs do not, making their new venture quite risky. To counter that risk, some owners employ professional workers with management experience. There are also some organizations that belong to the government which provide support for new entrepreneurs in the form of advice and training as governments tend to support business start-ups to benefit the overall economy.
If you are planning to become an entrepreneur, attend training courses to gain some managerial and leadership skill before you put your hard-earned money at risk. Or, work for someone else as an employee first to seek management experience.
6. Unestablished customer base.
A major problem facing new businesses is attracting new customers in order to build a solid customer base. The problem is intensified when there are well established rivals that already operate in the market. Imagine how difficult it would be to compete with Coca Cola or Pepsi, in case you decide to start selling a new type of cola.
In order to survive, a new business must establish itself in the market first and build up customer numbers as quickly as possible. Remember, sales fixes everything. In addition to finding and attracting new customers, the long-term strength of the business will depend on encouraging your customers to return to purchase products over and over again.
7. Poor cash management resulting in cash flow problems.
Not only lack of start-up capital to cover start-up costs is a major problem for many new businesses, but also financing working capital. Working capital is the money available for the daily running of a business.
Running short of capital to run day-to-day business affairs, or to pay monthly bills, is the single most common reason for business failure of new businesses to survive the first year of operation. Working capital is needed for day-to-day cash, for example, for paying for raw materials to produce products, giving trade credit to customers who cannot afford to pay cash today (debtors), or simply paying utility bills (water, electricity and gas) to keep the office running.
8. Lack of record keeping.
The lack of accurate records is a big reason for business failure as entrepreneurs do not pay sufficient attention to this need. They either believe that it is less important than meeting their customer’s needs, or they think they can remember everything.
Because it is not possible to remember everything after a period of time, most businesses, even newly formed ones, keep records on computer. That is fine. But you should also keep written records too just in case your technology breaks down.
There are many other examples that could be given to illustrate the crucial importance of keeping accurate and up-to-date records of business transactions and other matters such as: receipts from suppliers with details of raw materials deliveries, financial records as evidence for the TAX authorities (in case the TAX bureau questions the entrepreneur’s own TAX calculations), how many hours part-time employees worked last week, or if all customers paid their invoices.
9. Poor marketing.
Marketing is crucial for new companies too. It evolves around supplying the right products at the right price and in the right place.
Successful businesses are the ones that identify and then meet the needs and wants of their customers through market research. Businesses that do not carry out market research are likely to fail. It is important for new businesses to also identify the potential size of the market and find out the level of competition. Marketing problems arise when businesses fail to meet customer needs, thereby resulting in poor sales.
Small and new businesses might lack the know-how to do marketing successfully, or at all.
What new entrepreneurs do is they start with identifying a niche (or gap) in the market and then fill it in with their new product. For example, Amazon started using the Internet as a channel of distribution for books, Apple gave people tools to develop as human beings started being more creative and McDonald’s gave hungry customers around the world basic food (bread and meat) fast.
10. Production problems.
First, it can be difficult for new businesses to predict demand and accurately conduct sales forecasting. Start-ups tend to either over produce or under produce because of lack of experience and no past sales data.
Underproduction will lead to dissatisfied customers and loss of potential sales resulting in lower sales revenue.
Overproduction will lead to stockpiling, wastage and increased costs.
Second, new businesses are likely to experience high production costs due to the large amount of money needed to pay for the cost of equipment, machinery, tools, inventory of raw materials, rent, advertising fees, insurance and so forth.
Third, smaller business start-ups will also be at a cost disadvantage as they cannot benefit from economies of scale that allow larger and more established businesses to benefit from lower average costs of production due to their scale of operations. Smaller businesses are not able to get discounts from their suppliers for buying plenty of raw materials in bulk or being able to borrow money from a bank at a lower interest rate.
Forth, many new companies also fail to invest in new technologies that will results in being unable to compete in terms of price, design and quality, therefore not being able to attract new customers and maintain consumers’ loyalty.
11. Poor choice of location.
Choosing the right business location is a very important business decision. This is often true for businesses such as retailers, restaurants or coffee shops which need to be located close to their markets.
Businesses always face a dilemma in the location decision whether to be based in busy areas in the city center that offer the highest potential number of customers, or locate on the suburbs. The premises in populated areas will cost the most, while locations outside the downtown, where purchase price of land or buildings is much lower, will have less potential customers.
When choosing the first location, the most important consideration is the need to minimize fixed costs, such as rent or mortgage payments. Fixed costs form a large percentage of total costs for many businesses. And for start-up businesses, when finance is limited, it is very important to keep the break-even level of output as low as possible. The need to sell less products (equal to finding less customers) in order to stop making a loss and start making profit, will greatly increase business’s chances of survival.
An aim for any new business is to break-even as soon as possible by keeping fixed costs down. This is one reason why many entrepreneurs set up small businesses that operate initially from their own homes such as Steve Jobs and Steve Wozniak starting Apple in their garage or Jeff Bezos running Amazon from his home.
While a website designer, or a business blogger, could operate from home very efficiently, as communication with all customers will be by phone, email or social media, a bakery selling fresh cakes and cookies to busy office workers may need to consider obtaining premises in an area with the biggest number of potential customers passing by.
Of course, this option is not ideal for all businesses where location plays a key factor in business survival. The cost and position of the location chosen could have an impact on the business entrepreneur’s chance of success. New business that offers consumer services needs to consider location very carefully.
An alternative is to visit customers in their own homes. In this way, the entrepreneur may avoid the costs of buying or renting their own premises altogether.
12. Competition.
All businesses face competition. However, one of the reasons for business failure is the effect of the globalization of markets. Although globalization (an increase in international trade resulting in growth of multinational businesses) gives businesses access to wider markets, more employees to choose from and potential capital, globalization also means that competition is increased. Therefore, we face competition not only from local businesses in our own home country, but also from companies from other countries.
Businesses that are unable to compete on price and quality are unlikely to survive in the long-run in such as competitive environment. It is nearly always a problem for new enterprises unless the business idea is so unique that no other business has anything quite like it. But, considering the wide access to the Internet, it is quite unlikely these days.
Newly created businesses will always experience competition from older, more established companies with better access to resources, market knowledge and operational experience.
Hopefully, in order to compete with market leaders and other larger players, the new entrepreneur will need to offer better, more personalized customer service rather than try to keep competing on price and cost advantage.
13. External economic influences.
Starting a new business is a risky initiative because business environment is dynamic, constantly changing and unpredictable. Nobody knows the future – we can only plan for it as much as possible by preparing accurate forecasts. There is also an internal risk that the original business idea will not be successful.
All businesses, irrespective of size or how long they have been in operation, are prone to economic shocks that create a difficult trading environment, such as an oil crisis, coronavirus pandemics or economic recessions. Other unpredictable changes may include a new competitor, legal changes that outlaw producing and selling the product (gasoline cars? cigarettes?), economic changes like increase in TAXes that leave customers with much less money to spend or technological changes that make old production methods slow and costly.
The unpredictability and change are observed at every stage of running a business operation. However, new businesses are more vulnerable to external shocks making the potential for business failure greater. Unemployment, high interest rates and taxation may reduce the amount of money consumers have to spend on goods and services produced by businesses. This will reduce new businesses’ earnings. More established firms tend to be better resourced to handle these external influences. Older companies will more likely have finance to continue even when they are making a loss for a long period of time, sometimes even as long as for a decade.
In summary, a significant number of new businesses fail to survive. And there are three major reasons why so many new companies fail: lack of finance, poor cost control and lack of managerial competence among new entrepreneurs.
