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Small Business Failure Rates & What You Can Do About It

The Small Business Administration (SBA) shows that "two-thirds of new employer establishments survive at lease two years, and 44 percent survive at least four years." A strong business plan and comprehensive financial projections and analysis increase the success rate of a new company. Here are a few reasons that the SBA lists as to why companies fail.

1. The Company Has No Vision, Strategy or Business Plan
It is vital for all businesses to have a business plan and financial projections. Many small businesses fail because of limited business planning. Business plans must be realistic and based on accurate, current information and educated projections for the future.
Components may include:

  • Description of the business
  • Work force needs
  • Potential problems and solutions
  • Financial: income statement, balance sheet, cash flow, best case and worst case, break-even analysis, and much more
  • Competition strength and weaknesses
  • Market research and analysis

2. Start a Company for the Wrong Reasons
Starting a company solely to make a lot of money is not a good idea. Owning your own company will likely provide less time for you to spend with your family. On the other hand, if you start your business for these reasons, you'll have a better chance at business success:

  • You have a passion and love what you are doing.
  • You have drive, willpower, tolerance and an optimistic attitude.
  • You learn from your mistakes, and use these lessons to succeed the next time around.
  • You like independence, and are skilled at taking charge.
  • You like working with people. You get along with and can deal with all different types of individuals.

3. Overexpansion
A lot of business owners confuse success with how fast they can grow their business. A focus on slow, steady growth is optimal. Many companies have gone under due to overexpansion.

4. Weak or Ineffective Management
Many believe that the number one reason companies fail is due to poor management. New business owners frequently lack relevant business and management expertise in areas such as finance, purchasing, selling, production, hiring and managing employees. Unless they recognize what they don't do well, and seek help, business owners may soon face disaster.

5. No Website
In today's world, a business must have a website.

6. Under Capitalization
A common fatal mistake for many failed businesses is having insufficient operating funds, and unrealistic expectations of incoming revenues from sales. Business owners underestimate how much money is needed and they are forced to close before they even had a fair chance to succeed. A good set of financial projections allows the business owner to foresee sufficient capitalization..



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