Businesses Fail

Top Reasons Why Most Businesses Fail After 10 Years and How to Avoid It

Built a business you’re proud of?  Now the real challenge begins.

It’s no secret that businesses fail.

In fact, the majority fail within the first 10 years. 

A thrilling entrepreneurial dream can turn into a nightmare if not managed well.

But it’s not inevitable. 

Let’s equip ourselves with insights to prevent this from becoming your reality. 

Businesses Fail

So, what are the chances a business will fail?

According to the Bureau of Labor Statistics

  • 20% of businesses fail within the first year
  • 45% within five years
  • 65% within the first 10 years

One of the interesting things is that these statistics remained fairly consistent for the past few decades. That means there’s a lot we can learn from the past years. 

Here are the top reasons why businesses fail:

  • Finances – Especially Cash Flow
  • Financing Challenges
  • Minimal Operational Efficiency 
  • Not Focusing on The Customer and Evolving Marketing Trends
  • Lack of Effective Business Vision, Strategy and Execution

Finances – Especially Cash Flow

According to SCORE, a whopping 82% of small business failures can be traced back to cash flow issues.

That doesn’t mean the business isn’t profitable. But without the cash to pay employees and vendors, the business isn’t going to last long. 

While profits are important, they can be a lagging indicator. Cash flow, on the other hand, is a real-time reflection of your financial health.  

Don’t get caught up in the illusion of profitability on paper – focus on managing your cash flow effectively.  

There are many reasons for cash flow problems

  • Poor budgeting and forecasting 
  • Slow collections from clients
  • Unexpected expenses and emergencies
  • Inventory mismanagement
  • Expanding quickly without a cash flow management plan

While we can’t solve every cash flow problem in one day, we do have a ton of articles about cash flow because it is such an important topic, including:

Here are some key strategies to keep your cash flow healthy:

  • Embrace the “lean and mean” startup mentality: Especially in the early years, avoid major expenses and prioritize a conservative approach. This doesn’t mean stifling growth; it means being strategic with your resources.
  • Develop a budget and stick to it: A well-crafted budget is your roadmap to financial health. Track your income and expenses meticulously, and identify areas where you can optimize spending.
  • Inventory management is crucial: Implement a system to track inventory levels, forecast demand, and avoid overstocking. This prevents unnecessary costs and ensures you have the right products available to meet customer needs.
  • Consider partnering with an accounting service: A qualified accounting service that fits your vibe can be a valuable asset, especially in the initial years. They can help you set up strong accounting practices, optimize your accounts receivable/payable systems, and ensure you’re on top of your tax obligations.

Other financial threats

Now that cash flow is covered, here is a bit more you’ll want to keep an eye out for in your finances: 

  • Inconsistent Budgeting and Record-Keeping:  Without a solid budget and meticulous tracking of income and expenses, it’s difficult to identify areas for improvement or predict potential cash flow challenges.
  • Tax Neglect: Taxes are a fact of life. Neglecting your tax obligations can lead to hefty penalties and interest charges.
  • Limited Financial Network: Not building strong relationships with lenders and financial advisors can leave you with limited options when challenges arise. These professionals can provide valuable guidance, access to financing, and help you navigate complex financial situations. Take the time to foster these relationships as soon as possible – you’ll be better equipped to weather financial storms and seize growth opportunities.

Financing Challenges

While cash flow management is crucial, it all starts with having enough financial resources in the first place. 

“Of course!” you say. 

Doesn’t everybody wish they had a blank check from a wealthy, ethical, no-strings-attached funder? 

Well sure, and we’d be happy if you’d give them our number!

But the reality is, many businesses with millions in funding still don’t succeed. A blank check isn’t the answer to everything. 

Unrealistic Funding Expectations

Launching a business requires investment. 

Whether it’s personal savings, loans, or venture capital, not having enough capital to cover initial expenses and operational costs can hinder your ability to gain traction and establish a strong foundation. Entrepreneurs are often brimming with optimism, but it’s important to have realistic expectations about how much funding you’ll need to get your business off the ground. Underestimating your financial requirements can lead to a funding gap that limits your progress.

For example, if you’re thinking of launching a business that will require significant marketing efforts to succeed, it may be better to wait until you’ve secured enough funding for marketing before taking the leap.

The “lean” method can only take you so far, and it varies wildly based on industry and situation.

Poor Financial Planning

Beyond simply securing funding, a well-defined financial plan is essential. This plan should outline your funding needs, potential revenue streams, and strategies for managing your cash flow. 

By carefully considering your funding needs, developing a sound financial plan, and securing adequate resources, you can set your business up for long-term success…with or without that magical blank check!  

Operational Efficiency: Streamlining Your Path to Success

Operational efficiency is all about optimizing your processes to achieve maximum results with minimal wasted resources. Here’s how inefficient operations can impact your business:

  • Wasted Time and Resources: Inefficient processes can lead to wasted time spent on repetitive tasks, unnecessary rework, and underutilized resources. This not only frustrates employees but also translates to lost productivity and higher costs.
  • Inconsistent Quality: Inefficiencies can lead to inconsistencies in product quality or service delivery. This can damage your reputation and customer satisfaction.
  • Hindered Growth: As your business grows, inefficient processes become bottlenecks, hindering your ability to scale effectively. Streamlining your operations allows you to handle increased demand and grab those growth opportunities.

Here are some ways to improve your operational efficiency:

  • Embrace Technology: Automation and digital tools can free up your team’s time for more strategic tasks. Invest in software solutions that automate repetitive tasks, streamline workflows, and improve data analysis.
  • Standardize Processes: Develop clear and consistent procedures for various tasks within your business. This ensures everyone is on the same page, reduces errors, and improves overall efficiency.
  • Regularly Analyze and Improve: Don’t settle for the status quo. Regularly evaluate your processes, identify areas for improvement, and implement changes to optimize your operations.
  • Foster a Culture of Efficiency: Encourage your team to identify inefficiencies and suggest improvements. By empowering your employees and fostering a culture of continuous improvement, you can create a more efficient and adaptable business.

By prioritizing operational efficiency, you can free up valuable resources, improve your bottom line, and position your business for sustainable growth. 

Remember, efficiency doesn’t mean cutting corners; it’s about working smarter, not harder.

Focusing on The Customer and Evolving Marketing Trends

“Over 40% of small businesses fail because there’s an insufficient need for their product or service.” – US Chamber of Commerce 

The business landscape is dynamic, constantly evolving with new technologies, consumer preferences, and economic shifts. 

Business owners need to stay on top of this – just think of how much happened in our world in the last 10 years! 

Many businesses lose touch with their audience, assuming their needs are the same as when they first started out. 

Others fail to keep their fingers on the pulse of evolving markets, missing out on perfect pivot opportunities and untapped market segments. 

Don’t let this be your story!

How to stay relevant and thrive in an evolving marketplace

  • Embrace Customer Centricity: Put your customers at the heart of everything you do. Gather customer feedback, analyze buying patterns, and adapt your offerings accordingly.
  • Foster a Culture of Innovation: Encourage a culture of creativity and experimentation within your organization. Invest in research and development, explore new technologies, and actively seek ways to improve your products and services to better meet your customers’ needs.
  • Stay Agile and Adaptable: Be prepared to change your strategies and business model as necessary.

Business Vision, Strategy, and Execution

A business without a clear vision and well-defined plan can flounder. And even with that, the Founder of EOS Gino Wickman states “Vision without execution is just a hallucination”.

Without a clear strategy, it’s hard to create and measure goals. 

Employees might be unsure of their goals and priorities beyond the day-to-day tasks, resulting in frustration, stress, and wasted effort. 

And of course, businesses get stuck in reactive decision-making, instead of being able to anticipate what’s needed for their success. 

How to Build a Roadmap for Success

  • Develop a Clear Vision: Clearly articulate your company’s long-term goals and aspirations. What impact do you want to make? What problem are you solving or what need are you fulfilling? A clear vision inspires your team, attracts talent, and guides your strategic direction.
  • Don’t Throw Out the Business Plan: Business plans aren’t just for the first days of business and getting funding – revisit your plan and adjust it based on what you’re learning. 
  • Embrace Forecasting: Don’t just use your budget as a guide, transform it into a forecast. Some of our customers re-forecast weekly! It’s simply part of their regular weekly process. At New Economy, we do the same. 
  • Systemize Strategic Planning: Make sure you have it in your calendar and are regularly taking the time to update your strategy as needed. 
  • Focus and measure execution: Measure your progress. Hold the team accountable for completing the top priorities in the Strategic Plan. 

Other factors

This list isn’t exhaustive. There are countless reasons why a business could fail:

  • Lack of supportive company culture
  • Founder or employee burnout 
  • Not finding and keeping the right team
  • Competitors  
  • Poor customer service

It doesn’t mean you have to be scared. 

It just means you need to take some deep breaths and put business planning into your calendar as a recurring appointment. 

3 Key Takeaways

At New Economy, we help you use financials to make more money and better business decisions so you’ll be in business as long as you want.

Here are 3 key takeaways:

  1. Master Your Cash Flow: Don’t be fooled by profitability on paper. Focus on strategies like budgeting, inventory management, and building strong relationships with lenders and financial advisors to maintain a healthy cash flow.
  2. Embrace Change and Agility: The business landscape is constantly evolving. Stay on top of customer trends, adapt your marketing strategies, and be prepared to pivot your business model as needed. A culture of innovation and customer-centricity is key to staying relevant.
  3. Plan for Success: Develop a clear vision, create a comprehensive business plan, and revisit and revise your strategy regularly. This roadmap will keep your team aligned, focused, and prepared for future challenges.

There you have it 🙂

Businesses Fail

New Economy Team Members are Experts in Accounting for Entrepreneurs

If identifying ways to decrease your taxes is not in your skill set or you want to gain control of your finances to make smart decisions to build and grow your business, New Economy is an excellent partner

We’ll help you get your accounting and taxes done, and done right.

Schedule a time to meet with our Founder, Jeff, and discuss how we can help your business survive and thrive each year!