Owning a successful small business is not an easy undertaking – if it was, more people would be doing it. You get to be your own boss. You get to make every decision, from minor day-to-day items to critical, business-defining ones. And all the toiling and extra hours of work you spend directly benefit yourself, not somebody else. But the reality is that approximately 55% of small businesses fail in their first five years, and a whopping 71% are closed up before 10 years is through.
7 Ways You Can Avoid Being Part of the Over Half of Businesses That Fail In Their First Five Years
What can you do to avoid your small business becoming one of the 55% that fails after year five (or even worse, one of the 25% that fails after one year)?
1. Make Sure You Have a Good Location
It’s not just real estate where location is paramount. Saying the top three things to consider when starting a business are location, location, and location is a bit of a stretch, but not by much. Being able to be seen is undeniably crucial, and not just through your advertising – if your consumer base doesn’t know where you are, how are they going to purchase your goods?
This is less of an issue for service-related businesses (insurance, financial planning, etc.) as it is for goods-based companies (restaurants, retail, etc.), but it should always be taken into consideration regardless of your industry. And always be on the lookout for better locations if they arise – it’s obviously a bit easier if you’re renting or leasing as opposed to owning your building, but it should never be overlooked as being in a visible space or on a popular commuter route is key.
2. Make Sure You Know What You’re Doing
This sounds as if I’m being facetious, but I’m not. One of the biggest reasons entrepreneurs’ business ventures fail is because they have a lack of experience. If you are renowned for your soups at every single company picnic and family get together you bring them to, you might think to yourself that you could open up a soup shop. You’ve been told by dozens of people that your mulligatawny and curried split pea soups are the best they’ve ever had, and you know yourself that they’re to die for – why wouldn’t people come out to buy them in droves? They may, but if you’re a doctor or a lawyer that has never ran a restaurant before, you’ll be getting way over your head quickly as you have no food service industry experience and have never owned and operated a small business before.
People can do it, and successful businesses are started all the time by owners with no relative experience – but think long and hard about the risks involved and day-to-day upkeep of operation before jumping in headfirst.
3. Evaluate Your Competition
Another reason many small businesses fail is because they faced too much or too powerful of competition. Joe’s Coffee Shack was humming along smoothly until a Starbucks opened up three blocks down and offered a wider variety of products, and were able to sell those at a lower price since as a gigantic franchise, they could afford to operate at a loss for a long period of time. Joe couldn’t and had to close up shop, and Starbucks became the sole coffee shop around (and raised their prices to boot). That fictional anecdote happens nearly constantly, and although Joe probably couldn’t have stopped a coffee giant from moving in to the neighborhood, it’s something many business owners fail to think through before opening up shop.
Take the time to fully evaluate the competitive landscape of both your industry and your surrounding area and see if you’ll be standing alone or struggling to set yourself apart from the crowd. If you’re already in business but losing too much of your customers to your competition, try to think of ways that you can make your business and its products stand out from what your competition is offering. This may be as simple as a few additional items or as massive as a complete overhaul – but it will be worth it in the long run.
4. Insufficient Funds
Kind of seems self-explanatory (as in, “Of COURSE the business would fail if there’s no money, genius…”), but as shown in the example above, Starbucks was able to operate at a loss for a long period of time – as long as it took for Joe to have to shutter his doors and make them the only game in town. That’s a luxury small business owners simply don’t have.
When opening up your business, try to do everything in your power to keep a reserve of liquid, accessible cash that will last you a year with no income. If you have enough stored up to make payroll, pay taxes, make rent or building payments, and continue to market your business for 12 months, you should be able to weather the worst of economic storms. If you’re a business that is struggling and does not have liquid reserves to fall back on, seriously consider major ways you can cut your overhead to start saving up an emergency fund right away. It could just be the panacea that can get you through your next lean stretch.
5. Dipping In to Company Accounts
As a business owner, there’s an undeniable sense of pride when you walk into your business. You can look around and honestly say, “This is mine – I made this happen.” Obviously don’t get too megalomaniacal about it, but feel free to pat yourself on the back every once in a while for a job well done – you’re your own boss, you’re creating jobs and providing livelihoods for your employees, and you’re enriching your community. But be careful not to view EVERYTHING as yours – especially the corporate checking account.
Far too often, owners will dip in to the company account to pay for personal expenses. While it is technically “your” money, you should strive to keep business expenses and personal expenses completely separate. This will allow you to track with more accuracy your financial success and where you need to tighten things up. If you’re currently doing this, stop – if your personal funds are too tight, give yourself a raise, but try your best to stick to that salary. It will help you be better with financial planning for both business and personal expenses.
6. Lack of Inventory Control
One of the biggest reasons small businesses lose money is due to poor inventory control. Say you order 10 cases of Budweiser bottles to be delivered and served at your bar. When those 240 bottles of suds are gone, it is worth your time to check that against the register to see how many of them were actually sold. You and your employees need to walk the fine line between giving a few away for free to loyal customers (or possibly even to yourselves after hours), and running a tight ship.
Same goes for restaurants – nobody likes a miser who doesn’t let his employees sample the food they’re bringing out, or gives the occasional free meal away to the loyal customer that’s been coming in and eating the same lunch every day for a year, but make sure there are guidelines in place. If your employees know they only get one free meal per eight hours worked, that’s an accountable system that can be implemented into a successful method of inventory control. Your inventory of goods is your bread and butter – make sure you know where it’s going.
This is probably the best problem to have as a small business owner, but it is still most certainly a problem. Having an unexpectedly successful business and not being prepared to manage your following growth is a top reason why many small businesses falter. As with most things, planning is key – set financial milestones for your business and have actions to undertake when they are met. Constantly evaluate your books and expand or grow as soon as you can afford it. Striking while the iron is hot will ensure that you are taking advantage of your success before it passes (which it very well could).
There’s no surefire, guaranteed preventative measure to take to keep your business afloat. As mentioned earlier, running a business is a lot of hard work that isn’t cut out for everyone, which is a big reason why so many fail. But if you’re in it for the long haul and doing something you love, take the time to consider the common reasons for failure listed above and prepare against them. Doing so will give you a fighting chance be one of the 29% of small businesses that is still successful and thriving 10 years after opening day.