Four pitfalls that cause new businesses to fail

Prevent your company from becoming a statistic

If operating your own business has always been a dream, the fear of failure may be preventing you from starting. While there’s risk involved, there are best practices to learn from as you plan for business success.

Data from Industry Canada indicates that nearly a third of small businesses in Canada fail within the first two years. That’s an alarming statistic, considering, on average, nearly 100,000 new small businesses start up in Canada each year.

While there are many reasons that lead new companies to fail, here are four of the most common:

1. Not enough working capital

Many companies lack sufficient working capital, with new business owners discovering too late that they don’t have the funds to continue to operate.

A lack of capital can result from:

Poor cash-flow management

Effective cash-flow management is critical for a business to survive, but it can be challenging to achieve. There's often a delay between fulfilling orders and receiving payment. The loss of major clients can severely impact your revenue stream. Yet expenses such as salaries, leases, and utilities have to be paid while you wait for revenue to come in.
Failing to fully understand your company's cash-flow situation and effectively manage the risk will create problems. Having adequate access to capital to bridge revenue gaps and building a contingency fund is crucial.

Overestimating your margins

A business with a negative operating margin loses money. This can become an issue for a new business if you underestimate your costs and over-estimate revenue. If costs consistently exceed revenues, your business will fail.

When making revenue and expense projections, be sure to include best and worst-case scenarios and understand your costs intimately. You also need to have a strong pricing strategy in place. Customers must be willing to pay what you need to charge to be profitable.

Over-expansion or expanding too quickly

Every business owner wants their business to grow; some even believe growth is the answer to revenue shortfalls. Unfortunately, growth also comes at a cost.

Fulfilling larger orders or expanding into new markets often requires more inventory, staff, and equipment. How will you pay for these added expenses? Growth that is too fast or poorly planned can lead to a shortfall in working capital and subsequent financial problems.

2. Poor planning

You've likely heard it before: every new business needs a well thought-out and researched business plan. By building a strong plan, you create the best opportunity for success.
A business plan is the blueprint for running your company – it needs to contain the information and research required to guide your operations.

Examples include:

• a market analysis and deep understanding of your clients
• information about your organization and management team
• product or service details
• a specific and realistic marketing plan
• financial reports and realistic financial projections

Writing a business plan isn’t a one-time event – it’s a continual process and needs to evolve as your business conditions change. If you don't regularly review your plan, you can miss out on new growth opportunities for growth or significant market shifts.

3. Not knowing your market

Having a deep understanding of your market is a critical component to growing your business. You must clearly define your market, with an intimate knowledge of both your potential customers and your competition. Your product or service must address an unmet consumer need with a competitive advantage to help you sell.

Many new businesses fall short in this knowledge. They may have a great product or service, but face low consumer demand or high barriers to market entry that they weren't aware of.

4. Failing to seek expert advice

Every new business faces challenges; seeking out the experience and knowledge of experts can go a long way to helping manage the risks. Establish a relationship with a trusted team of professionals who know your company – a lawyer, a tax specialist, an accountant, a business banking advisor – this can go a long way to helping your business succeed.