In general, three out of ten small or medium companies close their doors in two years of activity. Data from Fundera also shows that 20% of those companies fail in the first year, while half fail after 5 years. The reasons for this are various, and include lack of customers, the high taxes, absence of working capital, among others.
All entrepreneurs know that there is no magic formula for a business to work, but it is possible to greatly decrease the likelihood of bankruptcy. Entrepreneurs who survive the earliest and most turbulent years of business point to entrepreneurial skills, operational logistics, and managerial skills as key factors for success.
It is on this “tripod” that entrepreneurs often fail when starting a business. Ignorance on financial aspects is also a common sight, as these matters are often treated as superficial and with less importance than they should have. The problem of not knowing a company’s market also happens frequently and hinders business performance.
There are several reasons that can lead a business down the hole – check below five of the most highlighted ones.
Not having a long-term view
Planning is essential for any company. Knowing how to manage natural business movements helps maintain healthy operation, but entrepreneurs often have problems dealing with short and long-term projects. Entrepreneurs have a hard time reconciling their long-term vision with concrete short-term goals, which hinders their plans for the future.
Lacking financial control
Besides not knowing much of the finance concepts indispensable for running a business, some entrepreneurs also lack financial controls. Usually, companies only have cash controls in place, mostly related to cash flow and payments, but those are not financial controls.
These should also include controllership indicators, which study the company’s past and target the results that have already been produced, such as the balance sheet, and planning, like the business budget of the year.
Lose sense of reality
One of the main characteristics of entrepreneurs is optimism. Believing that their idea is going to work and taking risks are usually attitudes that lead to starting a business. The problem is when this goes beyond reality. Entrepreneurs need to be optimistic, but having a keen sense of reality is also indispensable. Some degree of self-control is necessary not to create a fantasy and promise consumers something that cannot be delivered.
A lot of entrepreneurs find partners in order to start their businesses. While this is a move that brings additional views, skills and sometimes capital to a company, it is also one of the reasons that lead to business failure. In fact, partnership disputes are so common that some law firms, like Sutliff & Stout, actually have a dedicated practice area for that purpose.
Search for the perfect product
The period in which entrepreneurs plan their business before officially launching it is crucial but may actually be another reason for failure. This happens because spending a lot of time on developing a product and taking a long time to launch it, in the pursuit of the perfect product, can be a problem, as it often leads to increased money spending and possible causing bankruptcy.