Reasons Most Businesses Fail in The First 3 Years

If you're looking to start a business, thorough industry and market research is very important to ensure you have enough information about the product or market you're stepping in. These also prevent you from running into failure in subsequent years.

Starting a business isn't everything but maintaining the business is. In many cases, entrepreneurs and business owners tend to start up a business and then in the next 3 years, the business depreciates gradually and then eventually falls off.

Although as a new business or company owner, setbacks are unavoidable it is very important to know how to tackle these setbacks and if possible stop them at the very possible start to prevent their huge effect on your business.

Hard work, determination, consistency and motivation are essential to managing and continuing a business or company and preventing it from failing in the subsequent years to come. Sometimes, you might apply all these to your company or business but with a single mistake that might look simple, your company will go down the drain and either go bankrupt or liquidation will occur.

Every entrepreneur and business owner experiences ups and downs but their ability to pull through these difficult situations is what determines how well their business will stand, how long it will last and how marketable are the goods and services of the company. If you are experiencing tough times or it looks like your business is on its way to failure and you'd like to speak with someone, you can contact one of our Incorpuk experts for ways to get your business back on track.

Here in this blog, we will see the reasons why business fails in the first three years.

Most Common Reasons Why Business Fails in the First Three Years

Some of the common reasons why businesses fail are outlined here. These reasons might come into play directly or indirectly. Some of these reasons might affect other businesses and the business will solve them and rise back to the limelight, others will encounter these situations and fail.

It just depends on the people, how hard or severe the situation is and how well it is handled, how well the business's financial problems are attended to.

1. Poor Management

While unavoidable circumstances such as pandemics, natural disasters, war or economic recession can shrink a business or company or even make the company go bankrupt or at the worst, close down for good. The most common reason why businesses fail these days is as a result of poor management.

You might be wondering how poor management can cause the failure of businesses. Well if a business is properly managed, even when this difficult situation comes, it can be sorted out unlike when the business has poor management, the situation will not be managed properly and will keep on increasing and birthing other difficult situations.

A business needs to have a management that has a good knowledge about the business, willing to work and has the required skills to effectively manage the business when difficult situations arise.

Some persons are scared of thriving situations and so might even allow the company to fail because of the fear of the situation. As a member of a company's management board, you must always stand firm both in decision-making and action-taking that will favour the company or business.

Once there is poor management in a company or business, it will give birth to poor decision-making, poor action-taking, poor marketing strategies, and others. Once these issues reach an extreme, the business will fail without small or no hope of reviving except the quality of the management is improved.

Unwillingness to work can also lead to poor management. Some people when they create a company or start a business, employ their friends or families to work for them. Though everyone has different capacities and other family members or friends can work without a problem, it is necessary to keep our relationships far away from our business activities.

Mixing business and relationships might sometimes ruin the company. Some of these friends or family members will be unwilling to work especially if the pay is small or no pay at all. This will reduce the quality of decision-making as some of these management do not care how their decisions affect the company.

2. Poor Planning and Research

Before starting a business, research is very essential and is one of the key factors that will determine how successful the business will be in the long run. After thorough research on the type of business you want to start planning is next.

Planning the business activities and other related activities is very important for your company. This is made in the form of a business plan, a business plan is one of the most important and also the most underrated need for starting up a business.

Some entrepreneurs plan their business without putting it down properly and not putting it down at all. As an entrepreneur, having a good and well-detailed plan is very important for the formation, development and management of your business throughout its term. All you can do is add some other important information as the company or business continues to grow in subsequent years.

The business plan contains the assumptions of the income and outcome of the business. It also contains the business activities and all the processes necessary for the stabilisation of the business or company including the market research and research procedures for the business, the idea, vision and various ways of implementing the business activities in the market.

Without a business plan and research, there is a very high possibility that the business will remain stagnant or fail. Doing research will help you know the market trends and what is happening in the industry your business or company belongs to.

Below are some of the importance of having a plan and research before going into business.

• Increasing the viability of the business
• Understanding the market for your products or services
• Getting a budget for your business and if necessary soliciting funding or grants
• Spotting out the possible challenges the business might face in the future and the solutions to the problems
• Setting goals for the business and how to meet those goals
• How to maintain the smooth operation of the business
• Effective management of the cash flow of the business
• Understanding customers and potential customers and their needs and expectations
• Identifying competitors and monitoring them to keep your place in the market
• Establishing an efficient meeting for demand and expectations of the business including workforce, capital, production, pricing and profitability and maintaining a positive relationship with customers
• Creating and managing various marketing strategies for the business
• Creating a healthy and conducive workspace for employees and business owners
• Identifying the opportunities and threats to the business
• Identifying and monitoring trends in the market and industry to know the needs and behaviour of customers
• Creating realistic future projects
• Managing growth opportunities
• Adhering to the rules and regulations that govern the industry or country
• Availability of all the business licenses, certificates and receipts

All of the points above are part of a business plan which makes it very crucial to create a business plan for your business. While creating your business plan, it is also very important to do thorough research on the industry and market to have a clear understanding of the customer-client relationship.

Failure to provide a business plan for your business is one step toward the failure of your business shortly. Also, ensure to follow your business plan and do not deviate. All activities in the business plan should be implemented and adhered to strictly to ensure a smooth flow of the business or company.

3. Capital and Cash Flow

Money is very important for any business or company to function. When s business runs out of money, there is a very high possibility of the business failing. Sometimes the budget for starting a business might be higher than the available capital but the business owner will want to push the business with the available capital. Sometimes the business might go bankrupt along the way due to improper startup financing and bankruptcy.

The problems associated with capital and cash flows include

• Underestimation of start-up budgets or business running costs
• Unavailable financing
• Low sales
• Unexpected tax bills
• Unpaid customer invoices

Most times, financial problems usually lead to poor management and this greatly contributes to the failure of most businesses.

Most new business owners do not do thorough research about the cost and budget of running a business. They have little or no understanding of the cash flow of their business. Business plans and thorough research and surveys help entrepreneurs or aspiring business owners understand more about the capital, funding and cash flow of businesses.

For a business plan, you should seek a professional(business advisor or accountant) for proper guidance in making decisions you want to implement in your company or business. A good business plan will determine how well your business will thrive in the market.

Before starting a business, you should know the following:

• The start-up and operational cost of the business
• How much is needed for the running of the company in subsequent years
• Cost needed to maintain the company in the industry or market

Some businesses do not make profits in their first 2-3 years, so it is important to not expect immediate profits from your business or company and it is important to invest properly into your business to get positive feedback during the profits years of your business.

You should have a realistic expectation for your business and keep in mind that your business might not push in profits immediately after start-up and trading. You should also keep in place a source of income to support you financially before your business starts making profits.

4. Poor Marketing

Most times, entrepreneurs who are not experienced in the marketing field or have no idea about the marketing of that product or service emerge into marketing, they tend to fail thereby causing the business in general to fail. Some of these entrepreneurs do not know their rager audience thereby marketing and targeting every person they meet.

Poor marketing strategies can put a business to its fall in its first three years of operation. This fault might be from the entrepreneurs or the marketers who employ their products and services. Some inexperienced marketers in a particular marketing sector tend to receive contracts from companies and do not perform their roles as the marketer for the product or service.

As an entrepreneur or marketer, you need to identify and reach out to your target audience. You can get to your target audience through thorough and effective market research and communicating with your audience through a strategic marketing plan made by the marketer or you as an entrepreneur.

If you do very good target audience research for your business, and you succeed in getting your target audience and monitoring how competitors interact with their target audience, you can also reach out and maintain a positive relationship with your target audience. Maintaining a good relationship helps to bring customers or clients for your goods and services to your target audience.

If as an entrepreneur, you know you cannot handle the task of marketing for your business, it is advisable to contact a professional marketer to take charge of marketing for your company. Trying to handle marketing for your business when you're inexperienced and lack the necessary knowledge can be risky for a new business.

You can hire or even employ a marketer for your company but if you can handle the task and cut out expenses for your company, you can take on the role of a marketer for your company but make sure to perform adequate research about the product and the target audience

Social media marketing is one of the most effective forms of marketing these days due to the rising number of people on social media who can access your product or your company. It is very important to create a unique social media presence for your company or brand and foster a positive relationship with your target audience.

5. Wrong Reasons for Starting a Business

According to statistics from the SME Loans, 64% of the British workforce wants to start their own business, with rising values of 83% for 18-24-year-olds. However, not all of these people are starting their businesses for the right reasons. Starting a business for the wrong reason can contribute to the failure of the business in the future.

When you start a business for the wrong reason, some turnouts may become so disappointing that as an entrepreneur, you will want to quit the business in most cases, when entrepreneurs encounter problems due to starting the business for the wrong reason, they tend to give up on the business and quit or possibly sell the business or company to other people.

Even though all businesses are for profit, as an entrepreneur starting up and working for yourself, you should not be focused on working just to gain wealth for that particular time or difficulty. You should always think long-term of your business as a good entrepreneur.

The time, money, hard work and dedication all matter in the business and if you want to succeed, you should do that without expecting a very quick huge payout from your business. Most businesses do not realise profits in the first 2-3 years of their business. Some do realise some profits which will become more in the third to fourth year or even more of your business.

If your only focus is on the money, there is a high chance that that business will fail and possibly go bankrupt after some time. As an entrepreneur, investment into your business is very important and you should not take this part of your business lightly.

6. Absence of the Skill, Knowledge and Expertise Required

Most entrepreneurs go into business and make the mistake of obtaining the necessary knowledge, skill and expertise to effectively do the job or business properly. You must not be an expert in that field to start a business but you should gather as much information as possible about the business you want to venture into and how to navigate the market.

If you do not have enough information about the business, you might not be able to effectively manage the business and in turn, keep the business for a long period without running into problems or obstacles.

A business owner needs to have little or more knowledge about the management of the business in areas such as proper planning and market or industry research, financing and accounting, buying and selling of products or services, production, marketing, recruitment and HR and leadership.

This is a very big load on the business owner but a very important aspect of effectively managing a business.

You should always seek advice and guidance from business experts, financial advisors or even accountants to help you improve your knowledge, skill and expertise in areas you lack. You can also hire the service of experienced professionals whenever required.

Every entrepreneur has what they can do and what they cannot and the most important thing here is figuring out what you can and what you can't do. You'll focus more on what you can do effectively and better.

7. Low or No Demand For Product or Service

Some entrepreneurs and business owners start up businesses because they like and do not sometimes pay attention to whether others like the product or service or not. Most times, they do this based on their passion and love for a particular thing, therefore they feel they should begin a business based on what they love.

Before going on to implement a business idea, you should do thorough and effective market research. This research will help you to know if there is a demand for your product or service in the market. Sometimes the market might be too concentrated and cannot offer long-term success, if you find this out, then it is better to go for another business option.

Also, most products and services are very important in our lives and some are a result of adding more quality to our everyday lives. Mostly the high, moderate, low or no Demand for a product or service depends solely on the marketing of the product or service. All this solely depends on the effective planning and research of the business.

Even after the business has been established, market and industry research is very important for the business. You must know what is the trend, new tech developments, how the economy is affecting the market of that product or service, how competitor businesses are doing and how they market their products and keep in touch with social media trends.

By always ensuring to know the latest information trends, you will have a higher chance of having a great experience in the market and industry and you'll also have less risk of business failures or bankruptcy.

8. Problems with Leadership

Most business success depends on effective management which will come as a result of proper leadership. An entrepreneur with great leadership characteristics and qualities often has thriving businesses. Once an entrepreneur lacks leadership qualities it affects the well-being of the business unless they take advice from professionals.

People with leadership issues are quick to blame others or external influences when something goes wrong in the business rather than addressing the underlying issues. Sometimes entrepreneurs might be directly involved when something goes wrong in the company and only if they have great leadership skills, can they solve the problem within the company without blaming other members of the company.

To be a good leader in your business or company, you will have to

• Understand your strengths and limitations
• Be open to continuous learning and skill development
• Create a conducive and positive workspace for your company members to encourage productivity
• Be good at communication
• Be a good listener
• Set the right examples for others through your actions and be a role model
• Be good with conflict resolution
• Be a good decision-maker
• Be respectful and treat others with respect
• Always take responsibility for your actions
• Know the everyday activities of your business without directly being involved

Many businesses have failed due to the poor leadership skills of the business owners. You need to identify a problem with your business and put efforts into solving that problem in your company. It is very important to interact with other members of the company and know what they think about the company and its activities or sales.

Also, if you're a partner in a business, you should be able to effectively manage leadership conflicts within your partners without getting too many people involved. You can also outline the responsibilities and obligations of all business partners and members to prevent situations that might lead to leadership conflicts in the future.

9. Inadequate Commitment or Consistency

Commitment and consistency are very important to succeed. If you don't put in the work and effort in your business, then you should not expect good outcomes from your business. You should also be able to stand strong when things get tough for your business. This lack of commitment can result in laziness, fear, apathy, or not knowing the exact work needed to put into the business.

Lack of commitment can lead to bigger problems such as low sales, conflicts between company members, cash flow problems, dormant positions, absence of some statutory duties and other liabilities. It can also lead to days protection breaches which is a great problem for business owners who love to protect their data and work success from the public

Commitment and consistency help you build a unique brand or social media presence for your business which is one of the most effective forms of marketing and can lead to company success as long as the company maintains quality and is visible.

10. Workplace Conflict

If you have employees in your business, you need to be more careful about the type of employees you accept. You need to effectively manage roles shared among employees and make sure no one is overworking or doing another person's job. If a conflict arises between your employees, you should handle it with wisdom. You do not want to lose your employees to competitors.

You need to create a workspace that fosters unity and teamwork between employees of your company and make judgements without favouritism or emotions. Also, make sure to monitor your employee's actions and dismiss anyone that pisses a threat to the peace in your workplace or business.

11. Wrong Business Location

Location is very important when setting up a new business. You should consider setting up your business in a location where there is high demand and also in a location that looks more professional and stands out. You can also get an office to meet with clients or investors of your company or business and the location of this office will determine how much interest the other parties will have.

Choosing the wrong location is very detrimental to businesses, especially new businesses that are finding their way into the market. When choosing your business location, you can consider

• Location of your target audience
• Your competitor's location
• Reputation of the area
• Types and nature of businesses in the location
• Accessibility to the area
• Infrastructures and condition of business premises
• Cost and benefit analysis
• Availability of necessary services

You have to consider most of these factors when choosing a location for your business to be able to navigate the industry and market in general.

Conclusion

Most companies that fail during their first 3 years of trading usually have problems that revolve around capital or cash flow, poor management, poor leadership, poor marketing, bad or no planning and research and conflict among leaders or employees. As an entrepreneur looking to go into a business or start up a company, you should consider taking more of all these problems.

One very important thing to do is make a business plan and strictly adhere to it. The business plan will contain

• The budget for starting up a business which is the capital
• The cash flow required for managing the business till it starts bringing profits
• The roles of every member of the company
• Market research and analysis for the product or service
• Customer behaviour research
• Possible problems and limitations and how to solve them

Do you have any questions about the reasons most businesses fail in the first 3 years? Kindly contact one of our Incorpuk experts here.