Why most businesses fail in the first year

Mistake at work

Why most businesses fail in the first year

So what causes a business to fail? Rather let’s rephrase and say what causes a business not to make any money instead. Because not making any money is akin to failing. Continue reading to find out.

Reasons why businesses fail

  • Attracting the wrong customers
  • Poor customer service
  • Expanding too fast or over expanding
  • Lack of business plans or complex having business plans
  • Understanding your competition and risks
  • Bad internet presence

1. Attracting the wrong customers

The customer is always right. This saying is traditional in the sense that the customer is paying you money to continue running your business. But would you stoop so low that you burn out in the long run? Think about it. Attracting the wrong clients will cause you to burn out. Why? Because of their high expectations but low fees. Especially for a start-up, burnouts due to attracting the wrong customers caused the business to fail in the first year.

What you can do about it

Learn to pick your clients from the start. Depending on your industry, if you run a retail store, maybe you cannot choose your customers. Unless you prohibit them from entering. There is no business sense to do that so please do not do it unless they are disturbing your other customers. Which in this case, call the police.

Here’s a tip: usually the low paying clients will have high expectations. This is because they are paying you out of their own bank. They do not have a budget for your service. They are small. The better-paying clients will have a budget so they do not care about the nitty-gritty details. You will also not be micro-managed so long as you get the job done.

2. Poor customer service

On the other side of the spectrum is bad customer service. Let’s say an example that you run an e-commerce store. Your customer received a defective good and wants to return the product but unable to contact anybody. It could be because there aren’t any contact details on your website or there isn’t anyone replying to the emails/calls that the customer is trying to reach.

This article can bring you more insights about customer service, and how you can improve. Without good customer service, your customers will choose another service provider inevitably.

Perhaps you are over expanding and do not have the resources to handle the customers. This brings us another problem why businesses fail. Overexpansion. We will talk more about overexpansion in the next section.

What you can do about it

Communication is key. Businesses must find a way to achieve two-way communication with customers. Put contact details on your website or have someone attending the website/phone call wherever possible. Build up the business reputation from the start.

The next thing is that you should know how they are feeling when engaging your services. Get feedback to improve your business when necessary. There is software out there specifically to gather feedback from customers.

3. Expanding too fast

To run a business, you have to have enough resources to run it. Be it labor, skills or financially. Having too many customers may seem like a dream come true for the new entrepreneur. Yet, you have to manage and allocate your resources so that your clients will feel satisfied using your services.

Let’s say you run an accounting firm and you have lots of clients. Great. The day will come when deadlines are approaching. You have to get your client’s financials up to submit to ACRA (Regulatory body in Singapore) but you have no staff or time to do so. What you will face are many very unsatisfied clients who have to pay fines because of your carelessness in planning. Perhaps lawsuits against you and your firm.

Businesses that failed may have too little financing, requires more capital, more funds to carry on. If for example, a shipping/e-commerce company. The business may face abandoned and unfulfilled orders if there is a wave or orders suddenly coming in. Planning and forecast are key here if your business wishes to expand. We will look at planning in the next section.

Tips for expanding your business

Pay attention to your cash flow statement. Especially your operational cash flow. Get an accountant if you haven’t already to draft up your cash flow statement. It is important to understand where the money is spent and where will the money come from, and how it will impact your overall cash flow. If the finances are unsustainable, then it is worthwhile to do something known as budgeting.

Another thing to look at is your purpose. Why do you want to expand? Is it to reach new markets, or getting a larger market share in your current market? If you want to reach new markets, are the prospects interested or are willing to try the services that you provide? Now let’s talk more about planning.

4. Lack of business plans or complex having business plans

The lack of planning is also another reason why most businesses fail. Not researching the market, having a poor marketing plan may also lead to the demise of a company. Not only must the business plan, but it also has to know its long-term sustainability. The question to ask is: Is the business plan going to be more or less relevant in the future?

Either that or businesses have overly complex plans. If the business plans are not communicated clearly to the team members, they would not know how to executive them as intended. Perhaps they do not understand the plan at all, let alone execute it.

Learn to plan and communicate with team members

Creating a plan is like paving a roadmap to where the business is heading to. Plan, set goals milestones to ensure that the business is on track. With the right planning and flexibility, businesses have a better chance of succeeding.

Next about communicating the plan. Employees are most productive if they understand the purpose and direction. The bigger picture has to be communicated to them so that they know the reason why they are doing what they are doing.

5. Understanding your competition and risks

Businesses fail because they underestimate their competition. They are overconfident to step foot into the market without realizing the power of their competitors. Power could be financially or connections. For example, to step foot into certain industries like physical Oil & Gas trading, you would need a good network.

What you can do about it

First, you have to understand the risks as well as what is being discussed about planning your business goals. Research on the numbers, like what is the average return in the industry or the net margin. Research on the players. They could have a parent company behind them. Read up annual reports from players in the industry and know their subsidiaries.

And finally, do a feasibility analysis to find out if you are able to enter the market under budget. Quantify your results.

6. Bad internet presence

This factor may not apply to all businesses. Some businesses are satisfied at their current level and it is all good. They can continue to rely on word of mouth to grow their business. For example, traditional engineering companies do not have a website. They operate in factory areas such as Ubi Road or Kaki Bukit. They are the older generation of people who fix cars or motorbikes. They rely solely on word of mouth to get businesses.

Businesses may not be doing as well because they do not have a website. In this digital age, people searching for their needs on the internet. You have search why businesses fail or some other terms, and here you are. In this page.

What you can do about it

First, create social media accounts in your business name. Maintain the website by yourself or get someone to do it.

Our business used to rely solely on word of mouth until recently. To answer the relevancy of our business plan discussed above, we feel having an internet presence is going to be more relevant in the future.

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