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According to the Small Business Association (SBA), over 50% of small businesses fail within the first five years. That is not very exciting news for many small business owners but should be an eye opening statistic for aspiring entrepreneurs to make sure they plan accordingly. Here is a list of eight reasons small businesses fail.
1. Insufficient Capital
“Cash is King!” Without cash it is hard to feel as though you are sitting on a throne, especially if the business does not have enough money to stay afloat for taking care of monthly operating expenses.
2. Lack of Experience
There are many aspects that go into running a business and the core competency is business acumen. The owner is a pro at what he or she does and has passion about their work, but fall short at running the business. If an owner has not managed a business or does not have an education in business, he or she may want to seek out a mentor for guidance.
3. Poor Location
When opening a business it is important that you have three things researched, Location, Location, and Location! Researching the local market to determine the target market, competition, and government regulations could dictate if opening in a certain area is high risk or full of opportunity.
4. Poor Inventory Management
Not appropriately managing inventory can have a major impact on a small business, especially if working capital is low. Too much inventory on hand could take up space and fill a business full of product that is not selling. On the flipside, not possessing enough inventory could jeopardize fulfilling a customer’s order and possibly loss of business.
5. Over-Investment in Fixed Assets
Over investing in too many fixed assets (machinery, land, buildings, ect) to anticipate growth could hinder growth if productivity is not there or does not pick up according to a company’s projections.
6. Personal Use of Business Funds
A common mistake of business owners is using business funds for personal use. This makes small business owners prime targets for scrutiny in the event of an IRS audit. It does not look professional and could result in the IRS denying legitimate deductions and losses.
7. Unexpected Growth
Growth is a good thing but careful what you wish for. If managed poorly, unexpected growth can cause a business to fail. A larger demand could mean improving cash flow, growing the workforce, all while maintaining a high level of customer service.
Not properly tracking the competition or staying up-to-date with industry trends can sink a business quickly. Monitor the marketing strategies competitors direct at your customers.
There is no exact science to running a successful business but avoiding these eight pitfalls will improve an entrepreneurs chances.