Starting a new business is no easy feat. While there are many new businesses getting started every day, a large number of these businesses fail within a short period of time. According to the Small Business Administration, over 552,000 businesses were opened in 2009, while 661,000 businesses closed in the same year. Several factors can contribute to a business’ failure, but here are five specific activities that, if not properly executed, could lead to disaster in your business.
1. Not structuring the business properly. Starting a business involves making decisions such as whether or not you’ll have a business partner or operate alone, and deciding how you’ll want the business taxes to be handled (i.e. in a separate corporation or through personal taxes). An inadequate business structure could lead to personal liability, inadequate support (as from a business partner), or increased tax liabilities.
2. Insufficient market research (on the need for your product or service or on the competitive landscape). Some business owners are quick to launch a new product or service, without realizing that the demand for product or service is not as high as he had anticipated-or without realizing that the market is already saturated. This is a fast way to a business failure.
3. Not having enough capital or reserves to withstand the slow periods in your business (usually when the business is just getting started or when the peak season for your business-if subjected to seasonality-is over). Reserves are critical to a business. You could attract new customers and be profitable (on paper), but still have to close your doors because your customers are taking too long to pay you or because of some unexpected event such as an equipment failure. Having capital (in the form of investors/equity partners/bank lines of credit) is essential to the survival of your business.
4. Overcapitalizing (purchasing too much equipment/supplies/space before you even begin to generate revenue). While you want to make sure you have enough assets in order to operate your business, you don’t want to have too much, which will tie up your money. Rather than purchasing a warehouse or expensive fixed assets, consider leasing space or renting equipment as a less expensive means of providing your product or service to your customer. As a general rule of thumb, you should aim to have a positive return on your assets. Business owners should aim to have every asset purchased generate a specific dollar of income.
5. Inadequate record-keeping. When running a business, record-keeping offers all kinds of advantages. Financial recordkeeping allows you to track your income and expenses, and allows business owners to properly file their taxes. In addition, recordkeeping can allow business owners to know which products have the highest profit margins, which products sell the quickest (or have the longest shelf-life), and which method of advertising generates the most customers, and is therefore, the most effective. Without adequate recordkeeping, lots of valuable information is lost, leading to the failure of the business in the long run.
This list is not all-inclusive of the factors to consider when starting a new business. There’s so much more to it. For guidelines on making your new business a success, start with the Small Business Administration’s website at www.sba.gov .