10 Common Mistakes That Lead to Business Failure and How to Avoid Them

Have you ever come across the saying that 50% of businesses fail within five years? I wanted to discuss the updated statistics for business failure, the reasons behind them, and how you can prevent them by not making the same mistakes.

That statistic (a number compared to another number of the same type) has decreased slightly as of 2023 reporting. However, business failure in the first year has risen. The old statistics were: approximately 20% failing within the first year, 50% within five years, and 65% within ten years.

I always found it interesting that the percentage for the first year was so low compared to the time frame after that. Having worked with numerous small businesses, I have observed similar operational challenges and mental struggles amongst all of them. I figured out that the reason they survive the first year is they haven't run out of money yet to "fail". Many either invest in their business or secure loans, which means it takes time for them to deplete their funds. They may also have been doing successful actions that initially worked which were abandoned later. Those are my opinions but we will soon discuss the primary reasons discovered for business failure and how bookkeeping relates to some of them. But first, I want to illustrate how these numbers have evolved since 2023.

In 2023, the statistics were updated to: 23.2% of private sector businesses in the U.S. failed within their first year, 48.0% after five years, and 65.3% after ten years. 

Let's dive into the most common reasons businesses fail. Understanding these pitfalls is crucial for entrepreneurs and business owners who aspire to build successful and sustainable operations.

Poor Cash Flow Management:

• Not keeping track of expenses

• Overestimating revenue

• Not having enough to pay for bills

Hiring a bookkeeper would be a solution to this because that person would be tracking your income and expenses and sending reports to you.

Lack of Market Need

• Not assessing whether there is a need and demand for their product/service

• Too many competitors who have been established longer

• Lack of knowledge on how to brand oneself to stand out

Surveying for the demand and brand will help you avoid these mistakes and stay ahead of your competitors. Find out what the public needs and wants and how to communicate to them. Find out how to relate to them.

Ineffective Marketing

• Not attracting enough customers due to ineffective marketing

• Poor or no branding setting them apart from competitors

• No website loses a percentage of interested public based on survey

• Poorly designed website doesn't direct the public or attract them

• Poorly designed social media can come off unprofessional

• No social media can seem like a business is not legit or up with the times

• Not continually communicating to the public about products/services

Marketing is a very specific knowledge and strategy. Unless you know how to effectively market yourself, then it would be wise to hire a professional. If funds are short, you could always look to barter as a solution.

Poor Financial Management

• Lack of thorough financial evaluation, resulting in not seeing the big picture

• Not identifying red flags to address them and solve those problems

• Lack of ongoing or accurate budgeting to assess the real financial scene

• Not making timely and correct tax payments

Our CFO Strategy Services are designed to help prevent this cause of failure.

Leadership & Management Issues

• Poor decision-making which contributes to the downfall of the business

• Lack of industry knowledge causing mistakes and bad PR

• Internal conflicts or lack of team building and morale

In my experience, small business owners are often skilled at producing their product or service but may not be accustomed to managing others or handling various aspects of the business. Their expertise lies in the production division, focusing on delivering the product or service. For other areas, it's essential to collaborate with professionals to manage these functions effectively or appoint the right individuals to these roles.

Pricing & Cost Issues

• Setting prices too low can undermine profitability

• Setting prices too high can deter customers

• Not continually evaluating the pricing of cost of goods sold

This is undeniably a strategic consideration. I recall a story about a comedian whose agent increased ticket prices, resulting in a full house after previously struggling with attendance. This clearly highlights the importance of pricing strategy. It's essential to conduct thorough research on competitive pricing, ensuring comparisons are made accurately. For instance, a newly graduated bookkeeper with no clients cannot charge the same rates as an established firm with over 15 years of experience that also provides strategic consulting.

Failure to Adapt

• Not evolving with market trends to keep up with competition

• Not evolving with technology to remain in the face of your customers

A business owner will always need to stay on top of trends to remain current in the eyes of the public. Follow blogs or accounts on social media that can help with this. See what works for you and them implement that.

Legal & Compliance Problems

• Not submitting 1099's for contractors

• Hiring illegal contractors

• Not setting up your business correctly and keeping up with compliance

• Not submitting sales tax

• Not paying quarterly taxes

• Not paying taxes at all

Any of these issues can lead to significant financial and operational headaches. These mistakes not only result in potential penalties and interest charges from tax authorities but can also create a ripple effect, impacting cash flow and financial planning. Companies may find themselves facing audits, which can consume valuable time and resources, diverting attention from core business activities. It's best to work with an experienced bookkeeper and CPA.

Poor Customer Experience

• Bad service by your employees or yourself

• Slow response times in communication or delivery

• Disorganized businesses continuing to make mistakes

• Poor quality of product or service failing to meet expectations

Any of these can drive customers to competitors. This is also called "Bad PR" meaning your public relations needs a makeover. In my experience, when these things occur, it's due to the business being disorganized or there is a "bad apple" (employee) that needs to be terminated. Our Efficiency Consulting may be able to help you prevent this failure.

External Factors

• Pandemics keeping people at home

• Lack of materials due to supply chain issues

• Unexpected market shifts

These events often create an environment of uncertainty, forcing companies to navigate through turbulent waters that can threaten their very existence. This is why it's crucial for the business owner to know how to create strategies to overcome unforeseen difficult times and if this isn't their strong point, hire someone who can help them!

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#Finance #Bookkeeping #Money #BusinessStrategy