Half of all new businesses will fail in their first 5 years

You have probably heard that statistic– lots of articles repeat it – and you may be saying ‘No, it’s more like two-thirds’ but do you ever stop and say ‘So what?’ It is a useless statement … of no help to anyone.

Now, what would be useful is if someone told you why over 50 % of businesses fail in the first 5 years; particularly if you are starting a business and want to avoid the mistakes of those who have gone before. You see a lot of commentators talk about it as if it’s a lottery– half will fail we just don’t which half – whereas in reality there are several, quite simple, actions you can take to substantially increase your chances of success.

One caveat before we get started: there must be a sufficient demand for there to be a business in the first place. It’s easy to get excited about starting a business, friends and family don’t want to hurt your feelings … but think about the number of people who you need to buy from you at your price point to make it work. It will be very difficult to turn that into a proper successful business you can develop and grow. Keep it as a hobby– or lifestyle business– but that isn’t what we are talking about here.

The reality is that there are only 5 reasons why businesses fail. Someone once said there is only one– they run out of cash, but that is like saying someone died because they stopped breathing! What we need are the 5 reasons that cause businesses to run out of cash.

1. Spending too much on start-up costs and overheads

We’ve all seen the business that rents premises (and then pays rates, insurance, heating, lighting etc.), fits them out, buys equipment, employs staff, leases a new car, hire a marketing agency and buys (and pays for) stock all before they have sold anything. Retailers are particularly vulnerable to this– nice fancy premises full of paid for stock because no-one will give them credit– and then they wait for a customer to come in. Crazy.

Thankfully the internet has changed the need for all that. Start from a home office or very cheap shared office from which you can move at short notice. Source your stock but don’t actually pay for it until you need it or have an order, get paid with order rather than give credit, outsource rather than employ staff, use sites like Elance to get your marketing done and buy a cheap second hand car!

2. Getting ready to get ready

Failure to implement grips many first time businesses; they have been to courses, read books, taken advice from a small business adviser (none of whom have ever run a business) and have spent months since they gave up their job getting ready. Business plans, forecasts, samples, brochures, a website and a meeting with the bank manager (one of the books you read was ‘How to get the bank manager to say yes’) who turns you down for the loan your business adviser assured you was necessary.

But by now you are committed. You have rented a warehouse, ordered stock, printed the brochures; you beg and borrow from friends and family and then… run out of cash before you sell anything. Happens all too often.

Don’t get me wrong, there is a place for research, business plans, financial projections and advice (I make a living from them in one of my businesses). But sometimes you have to just get on and do it, get out and get some orders, create your own website (there are any number of good guides on the internet to building a simple, but professional looking site using WordPress), print leaflets and flyers to order rather than a fancy brochure. Find out if you can sell when it’s your wages that don’t get paid if you can’t.

3. Not getting and keeping customers

Which brings us to customers. Your most important job if you run a business is to get and keep customers. I’ll say that again – your most important job if you run a business is to get and keep customers. If you can’t or don’t know how to then find out because without customers there is no business. Discover whether you enjoy selling, negotiating prices, appeasing angry customers, giving them their money back and chasing overdue debts… it’s all part of the job and will land on your desk.

Because customers lead to sales and sales generate cash (easy isn’t it). A steady, and increasing flow of sales is the only way a business will succeed and grow. Fortunately there are some excellent resources to help you if you look for them– make sure they are produced and run by people who have been there and done it, but organisations like YourBusinessHQ and Entrepreneurs Circle both have on and offline resources to help you build your customer list and your database.

4. Not putting in the hard yards

I know, you’ll skip this one because that’ll never be you. But wait a minute, because unfortunately, in my experience, this is far more common than you ‘d think. You see to start with in your new business you will work longer hours, take less holidays, earn less and have more responsibility than you did before in your paid job with a company car and 4 weeks paid holiday. You may even employ people who earn more than you, go home at 5pm and forget all about the business while you are still there at 10pm stressing over an order that should have gone out. Running your own business is not for the faint-hearted.

There is not much you can do about this if working for yourself is not for you and you are not prepared for the hard yards in the early years. I don’t know of anyone who is successful who hasn’t put them in. I know plenty who have failed who haven’t.

5. Not looking after cash flow

This isn’t just about not running out of cash it’s more about understanding how cash flows– or perhaps more to the point why it doesn’t.

Here are my two rules for cash: 1)profit and cash are not the same thing and 2)cash matters way more than profit in the first five years. If you don’t get rule one (profit and cash are not the same thing) please read my book Figure it out– an entrepreneurs guide to understanding your business numbers which you can download here.

I am sure you get rule two, so what can you do to keep the cash flowing. Fortunately lots, if you have the courage to do the following on a regular basis:

· get payment with order or at point of sale (like retailers and restaurants do);.
· hold very little stock or none at all;.
· if you must give credit set limits and terms and stick to them;.
· have a follow-up system for debtors and execute it ruthlessly.
· put your prices up regularly;.
· negotiate terms with suppliers.
· prepare a cash flow forecast and update it monthly;.
· upsell and cross sell at every opportunity.
· introduce a premium product (20 % of customers will buy it).
These are just some of the things you can do to improve cash flow and survive, and are all the things the businesses that fail do not do. No-one can guarantee you are successful, but you can do a lot to stack the odds in your favour.

Noel Guilford, Principal at Guilford Accounting
Noel Guilford is the principal of Guilford Accounting a small business accountancy practice specialising in advising owner-managed businesses on current accounting, finance, and tax matters. You can reach him via email at noel@guilfordaccounting.co.uk or by phone at 01244 660866. He is the author of the 'Figure it out - an entrepreneurs guide to understanding your business numbers' which you can obtain by visiting guilfordaccounting.co.uk.​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ His latest book, How to Build a Successful Business' will be published in 2018.

Leave a Reply

Your email address will not be published. Required fields are marked *