Most Businesses Fail In Their First 5 Years: Here's Why?

According to research from the Bureau of Statistics, 20% of businesses fail in their first year in the United States. This percentage doubles up in their second year and over 50% of businesses fail in their first five years.

Entrepreneurship is admirable from afar but in reality, it is unarguably daunting. One thing that’s common with entrepreneurship practice is that it stretches the owner or founder.

Many founders ventured into entrepreneurship because of passion but they fail to realise that passion doesn’t sustain businesses rather facts and good credibility are great enhancers.

Anyone who already ventured into establishing a business knows how tough the first few years can be. Young founders may be wise to seek the expertise of coaches or business experts to seek assistance on how to navigate the exhausting journey of entrepreneurship.

While that sounds great, entrepreneurship is a unique journey that needs both the expertise of professionals and also the first-hand experience of the founder.

If you are considering starting a business, this article will help you understand why most businesses fail in their five years and how you can avoid it.

Factors That Influence Business Failure

Without restricting businesses to a certain time frame, businesses do fail which could sometimes be due to human factors, legal issues, government laws or financial struggles.

Read along as we explore the factors that influence business failure.

1. Human Factors

There are numerous human factors that cause businesses to fail. They vary from mild to complex issues which include

• Poor cash management: Every existing business survives with proper finance management. If a company fails to manage its finances, the business can go into extinction. Management of business finance involves a number of activities: planning, organizing, controlling, directing and communicating.
• Lack of employee management: Humans are the most difficult beings to manage, which is why government authorities and leaders in specific places establish laws and regulations that all members must abide by. Employees are representatives of your brand, they have direct communication with your consumers and suppliers. Any bad representation from them can greatly affect your business. Proper employee management comes with establishing the necessary rules staff should abide by and the penalties involved if defaulted.
• Lack of commitment: As stated earlier, entrepreneurship is a beautiful journey that stretches the owners or founders. To run an established business, your commitment will be tested. Business is never always rosy, there are trying times, especially in its early years. A founder will have to stay committed to survive the phase. Lack of commitment among stakeholders can affect the output of the business which can be a major influence on the close of businesses. Commitment among stakeholders includes employees' loyalty to their jobs, partners who are committed to the growth of the firm, suppliers who are committed to supplying only quality materials and a great commitment to serving consumers.
• Disagreement Between Shareholders/Partners: For businesses or organizations with one or more partners, disagreements do occur. However, when disagreement or misunderstanding are not properly managed, partners can pull out their shares from the company. Businesses may fail if partners with a high share percentage quit. The exit of a partner may affect the finances and other activities of the company.
• Legal Issues: Legal issues like lawsuits or court orders may cause business to fail. When a company has bad credit or experiences bankruptcy which may lead to incurring excess debts, the victim party may file a lawsuit against the company. Thereby causing the court to order a business closed down. Legal issues may also erupt from government orders. If a business fails to submit appropriate tax returns or fails to abide by rules given by state authorities, there can be a closedown order from the authorities. To enjoy business sustainability, maintain a good standing with government authorities in your jurisdiction.
• Financial Struggles: A major factor in the close of a business is insufficient funding or operation capital. Most small businesses fail due to this factor. Businesses can experience bad sales or wrong transactions which can make them lose enormous funds which can eventually lead to b business failure. Operational funds for business may include payroll funding, rent and utilities, overhead expenses and many more. When the business isn’t yielding so much profit to cater for operational funds, owners may acquire loans to save their business. However, consistent financial struggles may lead to the close of the business.

Reasons Why Most Small Businesses Fail in Their First 5 Years?

Small businesses in their early years are like toddlers who need special care and attention to grow. Businesses in their first five years will experience hurdles if not properly managed can crush the business.

For new entrepreneurs and founders, business is like a baby, established with passion but needs commitment, tenacity, good management structure and other essential ingredients to survive.

Many young entrepreneurs fail to see this, so below are the reasons why most small businesses fail in their first five years:

1. Cash Flow Problem

Running a start-up or new business requires a substantial amount of funds. When there is no sufficient cash flow, it can disrupt the activities of the company which can eventually lead to business failure.

Cashflow problems can generate issues such as late tax payments, inability to pay stakeholders, debts and recurring loans.

There are several reasons why new businesses may experience cash flow problems. Examples are:

• Low sales
• Poor finance management
• Unexpected tax bills
• Inflation
• High operating cost

New business owners underestimate the amount of funds required to operate a company. Many started the company with a desire but only a few did proper planning and research before establishing their new business.

Furthermore, founders and business owners should seek professional guidance at Incorpuk to walk them through the process of establishing a long-lasting business.

2. No Real Marketing Plan

Entrepreneurship requires tough skill which includes effective marketing. Inexperienced entrepreneurs think marketing is just about having good products, whereas, a good product is one of the basic steps of gaining good credibility.

The success of any business lies in how goods or services are well communicated to the desired audience through effective marketing.

Marketing is regarded as a tough skill because it requires strategic market research and positioning of the target audience to produce results.

Failure to curate a strategic marketing plan is the reason most small businesses fail in their first five years. For new business owners who are thinking long-term, you may need to outsource an expert or marketing manager, this will generate an impressive return to your company.

3. No Good Credibility

One of the reasons many small businesses fail is due to bad credibility which may result in poor customer service and poor product.

Marketing is quite good but only a good product will keep customers glued to your products.

Also, customers love to feel good when they are purchasing items from your store. It's the way you make them feel during a purchase will encourage them to keep coming.

New business owners should ensure anyone (stakeholders) representing the brand abide by work ethics.

4. Lack of Proper Work Structure

Every company has its organizational structure to ensure orderliness and accountability in the firm.

Many small businesses start as a sole proprietorship or single-member company which may lack the necessary work structure needed for the growth of the business.

Small businesses may lack the necessary funding to employ skilful individuals to take over different tasks in the company. However, there's wisdom in putting up a proper working structure, this will ensure all stakeholders take their roles and responsibilities with optimum performance.

A work structure is also known as an organization structure which includes:

• Job titles
• Job roles and responsibilities

5. Lack of Innovation

Change is constant in life and every business owner must understand the importance of innovation to their business. Innovation is the practice of creating and implementing new ideas for your business (either goods or services).

Innovation may occur at different levels, namely;

• Innovation in the quality of produce or service rendered: Examples of industries with great innovations are the fashion and tech industries. New styles and gadgets are available yearly for consumers' needs. The ability to always meet consumer's needs with great service is top-tier.
• Innovation in the packaging of goods or products: Innovation involves implementing ways to improve your business. Introducing a new style of packaging to your product can bring about positive growth in your business.
• Innovation in marketing style: As a business owner, the ability to observe the likely cause of low sales or fall in business is important. When you discover that your business is experiencing a decline or poor marketing returns, it may be time to explore new marketing options. An entrepreneur has to constantly seek ways to improve the business or hire business experts as this will help sustain the business and keep it in vogue.

6. Inability to Decipher Consumers Want:

Sometimes you have a good product and your customers don’t consider it good enough. After all, the business exists because of the customers/ consumers.

As a business owner, you have to pay attention to your customer's purchasing experience. Ask them for feedback or review after purchasing your product. It helps you to understand their wants and how they would love to purchase your services.

Market research and proper follow-up on clients can help decipher how customers perceive your brand. This will help in discovering consumers' needs.

7. Rigidity (Lack of Flexibility)

After launching your business, this isn’t the time to become complacent. It's possible that the need you're meeting won't always exist. Keep an eye on the market and recognize when to make changes to your business plan.

Keeping up with major trends will give you plenty of time to modify your approach and continue to be successful.

Rigidity will only lead to business doom but being flexible and open-minded as a business owner will give you room to explore and discover the best ways to grow your business.

8. Lack of Industry Knowledge

A good example is the technology industry, if you don’t have a good knowledge about the industry, starting any business related to it is bound to fail.

You need to be well grounded about how the industry of your business operates before launching. Some businesses or goods have certain lifecycles or shelf-life. This is why it is important to make feasibility studies and good market research before embarking on any business.

9. Lack of Vision

Only intentional business owners think long-term and strategically launch a sustainable business. People start businesses for different reasons such as passion, as a side hustle or fulfilling a parent/ guardian wish.

To build a sustainable business, there has to be a written vision, it serves as a reminder when the going gets tough. No matter how good or bad business has become, business owners go back to their vision board to maintain focus and remind themselves of the goals they plan to achieve.

Lack of vision is one major reason small businesses fail in their first five years.

10. Inability to Analyze Competitors

New business owners fail to understand the influence of competitors in their business. A careful study of your competitors can help you discover consumers' wants and why they prefer other brands over yours.

This is a crucial part of marketing research that should not be sidelined. Observe how your competitors are unique and integrate it into your brand without losing your brand relevance.

Conclusion

As a small business owner, do not get overwhelmed by every piece of information when you hire a professional for your business sustainability. All activities such as drafting a proper business plan, implementing new marketing options and establishing a proper working structure can all be done by contacting Incorpuk today.