Why 8/10 Businesses Fail – How To Increase Your Odds

You’ve decided to start your own business.  You’re wished every success!

Have you armed yourself with enough knowledge about business ownership to increase your odds of not becoming a fail statistic?

Many entrepreneurs start a business that they’re passionate about or good at doing, like cooking, dog walking, or painting.  There’s almost nothing wrong with that except that being a good cook doesn’t mean you should call yourself a chef and open a restaurant.

Passion alone doesn’t guarantee success. In fact, it could be a recipe for failure. 

 

Thank you, Benjamin Franklin, for that sound advice.  

 

 

1. MARKET DEMAND AND COMPETITION

Many businesses fail because they don’t have a product or service that’s in demand in the market. Competition can be fierce in many industries, and businesses that fail to differentiate themselves from their competitors or offer unique value propositions are likely to struggle:

•   There must be an opening or unmet need within a market and then fill it rather than try and push a product or service in. It’s a lot easier to satisfy a need rather than create one and convince people that they should spend money on it.
•   This could be due to poor market research or an inability to differentiate their product or service from competitors. 
•   Think: competitive advantage…why will a customer buy from you instead of your competitor? What do you do better, different, more? Figure that out and promote it.
•   Beware of entering saturated markets. Ensure that there are enough customers in your target market or area to spread between you and your competitors. For example, a small rural town with one pet store doesn’t likely need a second pet store…unless they don’t do grooming or doggy daycare, in which case, THAT would be your competitive advantage and could possibly be an untapped market for you—assuming there aren’t any groomers and daycares around. 
•   You have the highest chance of survival if you can enter a market that has a high demand for something, but the supply is low.

 

2. INSUFFICIENT CAPITAL TO START OUT 

Starting a business requires a significant amount of capital, and many businesses fail because they don’t have enough funding to cover their expenses, including rent, inventory, and marketing:

•   If a business is realistic at the beginning, it can plan to start with enough money that will last to the point where the business is up and running and cash is actually flowing in.
•   You need enough cash to not only open your doors, but you should also have enough to pay the first 3 months of expenses until sales start rolling in. Businesses generally start with very slow sales in month 1 and gradually increase each month. 
•   Borrowing from friends and family would likely have the lowest interest rates, but many people don’t feel comfortable doing this.
•   If you own a home, a refinance or second mortgage might be options for you.  If you’ve owned your home for 2+ years, you might qualify for a home equity line of credit.
•   Need a Government or Bank loan? If you’re under 39 years old, Futurepreneur Canada has an excellent loan program for up to $60k. If you’re over 39 or if you need more than $60k, drop us a line and we’ll tell you which gov’t or bank loans you qualify for (for free). We love helping point new businesses in the right direction…afterall, we were once a new business and needed help getting started. 
•   It’s shocking how many new business owners don’t put together a basic cash flow spreadsheet before starting their biz. It’s easy…just map out how much your expenses will be each month (rent, inventory, salaries, phone and internet, supplies, etc.) and how much profit you’ll need every month to cover your expenses. Crunch your numbers for each of the first 12 months.  If you need to make $15k profit each month to cover your expenses, figure out what your average sale will be and how many customers you’d need. Is that number of customers realistic?  Make your numbers a bit worse than you expect because new business owners are always far too optimistic with their numbers.

  

3. BUSINESS PLAN PROBLEMS

A solid and realistic business plan is the basis of a successful business. In the plan, achievable goals are outlined, how the business can meet those goals, and possible problems and solutions:

•   It will figure out the costs and inputs needed for the business, and outline strategies and timelines that should be implemented and met.
•   Once you have the plan, you should follow it. If you start doubling your spending or changing your strategies whimsically, you are asking for failure:
  •   The more mistakes you make, the more expensive your business will become and the greater the chance of failure.
•   Your business plan should also have 1 to 3 year projections. See point #2 above for details. 
•   If you need help, we can write a plan for you in just 7 days.

 

4. BAD LOCATION 

You’ve heard it before: “Location, location, location!”  It’s one of the most important factors when you have a “destination business” meaning that people are coming to your brick and mortar building to buy stuff. 

•   Location isn’t important when you’re strictly on-line, but if customers are coming to your office/spa/restaurant/showroom, etc., or if you offer on-site services in the local area,  ensure that your local area has many ‘ideal customers’ (your target market) living or working nearby. 
•   If customers are coming to you, your location will make or break you and foot traffic (passerbys) will become one of your major sources for new customers. So, if the street you’re on ain’t busy, you won’t get much foot traffic and you’ll likely wish you had chosen a different location…unless your social media accounts have a few hundred thousands followers and you kick butt at social media posts and advertising. 
•   CoffeeTime, for example, will only open locations in mid to low income neighbourhoods because the majority of customers (their target market) are not high income earners. They know that if they opened a location in Yorkville or another rich area, it would fail.
•   Availability and visibility of a business is as critical as a social presence online to let customers know it is there.

 

5. ECONOMIC CLIMATE

Economic downturns can significantly impact businesses, particularly those that are just starting out:

•   This can lead to decreased consumer spending, decreased demand for products or services, and increased competition.
•   All businesses should have a premeditated plan for what they will do when the economy takes a dive, or when sales fall off.
•   The plan should include how the business can “pivot and adjust.”  For example, during Covid, many “destination businesses” (brick and mortar) created online stores to sell their products online. Some pivoted their entire business model, added a new service offering, or enhanced their technical capabilities to offer services remotely/online rather than in-person. Tutors, consultants, even tradeshows all went online. Restaurants who previously didn’t deliver started delivering. 
•   One of our clients was hugely successful in pivoting: pre-Covid, he supplied meat to high-end restaurants and golf courses, but as his customers closed their businesses, he needed a different target market to sell to.  So, he started a home-delivery service.  It wasn’t worth it to make small deliveries, so he identified that his target market was big families with extra freezers, and directed all marketing efforts toward them. This new business model has generated more revenue than the old one did, and he absolutely loves doing it!
•   Those who weren’t able to pivot and adjust during Covid, closed…or got an exceeding number of grey hairs.

 

6. MANAGEMENT

Many businesses fail due to poor management, including a lack of experience, education, leadership, hiring or strategic planning:

•   This can lead to poor decision-making, financial mismanagement, and a lack of direction for the company.
•   If accounting and strategic planning is your weakest skill, get help!
•   If you lack experience, consider hiring or partnering with someone who has the experience you lack. Or, find a mentor who can help you. 
•   If you’re struggling to be a strong manager, read the best books on management and leadership. Aim to not just be a manager…aim to become a mentor!  There’s a big difference!  If managers are white or purple belts, mentors are black belts. Inspire your staff and your business will perform better. 
•   If you struggle with sales and motivation, get the audiobook: The Psychology of Achievement by Brian Tracy. It will change your life.

 

7. MARKETING 

Many businesses fail because they underestimated the importance of marketing or cheap out and don’t adequately market their products or services:

•   Without effective marketing, businesses may struggle to attract and retain customers, even if they have a high-quality product or service.
•   BEFORE you do ANY marketing, you must know who your target market is, where and how best to serve their needs. Paint a picture of the type of customer who will most likely buy from you i.e.:  age, income, gender, career, interests, ethnicity, where do they live, what are their ‘pain points’ (why they need your product/service and how you can solve their problem), their greatest hesitations to buy from you, etc.  Know your ideal customer inside and out and direct your marketing efforts toward them.
•   If you’re a “destination business,” ensure that your local area has many ‘ideal customers’ living or working nearby.  
•   These days, depending on the type of business, a strong social media presence and following can be more important than a company’s physical location. But if they have to drive to your business to buy your product or service, having a bunch of followers outside your city or in another country won’t help you much unless they’re sharing your content with people in your local area.

 

8. LEGAL ISSUE QUAGMIRES

Businesses may face legal issues that can result in fines, lawsuits, or even bankruptcy:

•   These issues can arise from failure to comply with regulations, contract disputes, or intellectual property violations.
•   We’ve seen many businesses taken down by lawsuits, so protect yourself as best you can.
•   Incorporating (rather than operating as a sole proprietor) adds a layer of protection as people can’t come after your personal money or assets in the event of a lawsuit. They can only sue the corporation. You can incorporate yourself online or pay a company to do it for you…like us.
•   Having basic liability insurance is wise for many companies, particularly for brick and mortar businesses that are at higher-risk of lawsuits, fire, or damage (like retail, restaurants, housekeeping, or logistics). If someone slips and falls in your restaurant…or even on an icy front door step, they could sue you.  Basic liability insurance costs approx $750 a year for most industries.  We refer all our clients to an insurance broker who we’ve been working with for years. We’d be glad to pass you his contact info. 

 

 

1. UNDERSTAND HOW TO READ YOUR FINANCIAL STATEMENT

Every business owner must know the numbers first and learn how to prepare a profit & loss statement and balance sheet:

•   Projected revenue, cost of goods sold, expenses, and related taxes make up a “profit & loss” statement.
•   Business owners who stay on top of their P&L (profit & loss) can identify ways to increase profit or decrease expenses.  Too many new business owners run their business for years thinking that they’re making more money than they actually are. If they had stayed on top of their P&L, they could have made different decisions along the way that would have saved them or made them money. 
•   Watch this YouTube video: The Income Statement Explained (P&L)
•   If you’re totally lost, one of our CPA’s can do a free deep-dive analysis of your financials and show you where you’re on and off-course. 
•   We also have CFO services if you need ongoing support.

 

2.   UNDERSTAND HOW TO ANALYZE YOUR BALANCE SHEET LIKE A CFO

The balance sheet shows all the assets & liabilities, shareholders contributions, and retained earnings of the company:

•   This information is what lending institutions, investors or potential shareholders will rely on to determine the strength or weakness of your company.
•   Watch this YouTube video: How to Read And Analyze The Balance Sheet Like A CFO.

  

3.  IMPLEMENT AN ACCOUNTING SOFTWARE PROPERLY 

When setting up your business, it’s critical to track this valuable information with a solid accounting program:

•   Software like Quickbooks or Sage 50. We recommend Quickbooks Cloud (Intuit) so you can view your books from any device. 
•   Immediately connect the business bank account to the accounting software. This includes any business credit cards or personal accounts that you use to operate the business.
•   Properly set up your customers and payables.
•   Track all related business activity: create invoices, apply payments, and input expenses. 
•   If done from the start of opening your business, this will ensure that your profit & loss statement and balance sheet are accurate.
•   The earlier an entrepreneur learns how to read the balance sheet and manage the profit and loss statement by having a proper accounting tracking system in place, the sooner the entrepreneur will be able to strategically plan for the future of a successful business.  
•   If you’re a new entrepreneur and need support with getting set up properly with your accounting software, our epic accountants can help.
•   If all this talk of accounting and bookkeeping gives you a migraine, hit the ‘Easy Button.’  We can take care of your monthly bookkeeping, HST, WSIB, and payroll so that you can take care of growing your business!

We hope this article has been helpful!  Our team at the Mississauga offices of PFG Financial and at Phoenix Management wish you the VERY best with achieving your business goals! 

 

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