This article are provided for information purposes only, and are not intended as legal advice.


Why do so many businesses fail in the first three years?

August 28th, 2009

The first three years of a new business are critical and many of new businesses fail within that period to time.  Why do they fail?  Here is a partial list of reasons:

 

  • lack of financing
  • lack of customers
  • economic dependence, you only have one or two customers and one of the customers leaves for whatever reason
  • inability of management to cope with growth of the firm
  • lack of inventory, lack of credit at suppliers therefore unable to purchase goods for resale
  • poor decisions made by management
  • purchasing the wrong inventory or too much inventory that had to be liquidated to sell.  If you are in the retail business and all the merchandise that you bought was in the colour green but that is no longer in fashion, you have an entire product line what no one wants and you are forced to take a loss on the sale of the merchandise
  • business does not keep proper accounting records and does not realize that they are selling the goods for a loss and losing money on every sale that they make
  • too rapid expansion.  If the company is growing too quickly, it may not have to working capital to accommodate the growth.  Money is tied up in receivables with no money to pay creditors to purchase more products on a timely basis
  • long time for collecting of accounts receivable
  • being a nice person and giving everyone a discount so that you are never making money
  • costs such as rent too high to support small sales.  You need to walk before you run.  Many years ago,  a business which no longer exists, wanted to expand so the owner moved from the 30,000 square foot warehouse to a 80,000 square foot warehouse.  Sales stayed the same but the overhead increased significantly
  • in order to save money, the business buys large quantities to get a discount – for example, they purchase a container of goods from China but only needs 10 items rather than the 200 in the container.  They believe that they got a great bargain and an excellent price.  It may have been a good price but if you did not need the product and cannot sell it, it does not matter that you got a cheap price. when starting a business, buy smaller quantities from third party distributors, test the market and if you believe that you have enough customers to support buying greater quantities go direct.  Too many businesses believe that they need to get the cheapest price for everything they buy.  That makes good business sense however you need to ensure you can sell everything that you buy in a short period of time.  Using middle man/distributors to buy small quantities may result in a smaller gross profit but at least it may not result in a large write off of unsold inventory
  • not being able to turn inventory quickly and overbuying for certain occasions.  If you are a retail store, your most profitable period is Halloween.  If you want to maximize your sales, you have a large amount of inventory.  If you cannot sell that inventory, you will have to hold it for another 12 month period until the next Halloween.  If what you bought was a trendy item – such as masks of Bush but next year, it is no longer a sought out commodity, you waited 12 months before you liquidated your inventory at a deep discount.  If you do this for all the special events – Christmas, Easter, Mother’s Day, Father’s Day etc you could end up with a lot of slow moving inventory which ties jp your working capital
  • trying to be too many things to too many people and not focusing in on a particular business
  • spending money on advertising which did not work.  I knew a company which no longer exists, that spent $80,000 on advertising.  100% of their business was based on  tenders therefore the advertising was a wasted expense
  • expanding into too many areas without having the proper manpower and working capital
  • not being able to purchase equipment to be used in the business because of lack of capital

 

Many new business fail because of lack of capital, that can result from not enough initial capital invested by the business owner, expanding too fast, purchasing the wrong products or overheads are so large that the current sales cannot support those costs.  These are some of the many reasons why businesses fail in the first few years.


Filed under: Starting a business — Gary Landa @ 8:50 am


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