Why So Many New Businesses Fail – and How Not to Be One of Them

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how to start a successful business
There’s a reason why so many people prefer to be on someone else’s payroll, rather than running their own business. It’s called failure. Many new businesses fail, and that’s what keeps more people from trying their hand at self-employment. But there are ways that you can avoid becoming one of the new business casualties that…

There’s a reason why so many people prefer to be on someone else’s payroll, rather than running their own business. It’s called failure. Many new businesses fail, and that’s what keeps more people from trying their hand at self-employment. But there are ways that you can avoid becoming one of the new business casualties that litter the economy each year.

Before starting the business, do your best to get an upper hand in these five critical areas.

Choosing the Wrong Business

People often choose a certain type of business because they believe that it’s profitable. They often believe this because they saw it on TV, read an article, or know someone who is succeeding in the business. But whether or not that’s true, it’s not a good way to choose the business that you will be entering. Choose the wrong business, and you are practically guaranteed business failure.

When choosing a business, it’s more important to make sure that it’s the right business for you. That means that it needs to be consistent with your skills and abilities, as well as your personal desires. The business should be one that flows naturally with your talents, and involves a product or service that you feel passionately about.

This will not only increase your chances of success, but it will also shorten the learning curve. Even if you convert your current job skills to a business, there will be a learning curve. Performing a service for someone else for a guaranteed paycheck is not the same thing as selling to a client, who has the option to go somewhere else for his business. You’ll spend a lot of time learning how that will work in your business, so the more closely the business aligns with your skill set and abilities, the less time it will take.

One other thing…when you’re self-employed, people can tell if you like what you’re doing and if you actually believe in your product or service. That may be the whole reason why they’ll do business with you in the first place.

Lack of Capital

Even if you are entering a business that doesn’t require any capital up front, your business can still fail for lack of money.

At a minimum, you may need plenty of cash reserves so that you will be able to pay your bills and survive during the ramp-up phase of your business. By having reserves that could enable you to survive for at least 12 months, you’ll be giving yourself the time that you need to make your business work. That by itself can be the difference between success and failure.

You may also need capital for future expansion purposes. For example, even in a shoestring business, you may need several thousand dollars to purchase a certain piece of equipment that will enable you to greatly expand your output. If you don’t have the money to pay for it, you can be working with a handicap.

Even once your business gets rolling, you’ll need to have a concrete plan to save money. A business owner always has a greater need for capital than someone who is living on a salary. The future may hold a dry spell or two, and that cash can enable you to stay in business even when the money isn’t coming in the front door.

Inadequate Cash Flow

For anyone who is self-employed, generating cash flow is always the first and most important job. No matter how great your product or service is, and no matter how knowledgeable you are, your business can still fail if you have an adequate cash flow.

Typically, this is a bigger problem when you’re business is first starting out. You will increase the chance of success if you have a definite cash flow from the very beginning. This may require that you begin your business as a side venture, as you acquire several clients – while you are still on your employer’s payroll – before going full-time on your own.

It’s unfortunate, but true, that some businesses that start with no cash flow are out of business a year or two later. You should never underestimate the central importance of cash flow.

An Unproven Marketing Plan

Creating and sustaining a steady cash flow mostly depends on having a solid marketing plan. A proven marketing plan will give you the ability to generate and increase your cash flow as needed. And, like cash flow, your marketing plan should be developed – and tested – before your business plunge becomes full-time.

Marketing plan and cash flow. If you can get even a small cash flow going before quitting your job, your chance of business success is dramatically higher. For example, let’s say that you are able to generate a cash flow of just $500 per month before taking your business full-time. That may not be a lot of income, but if you can scale that up – and do it quickly – you’ll have the confidence of knowing that your business will succeed. Conversely, if you have no cash flow at all, there is nothing to scale, and your business is little more than an experiment.

Your marketing plan can provide you with the ability to scale your cash flow. And if you’ve tested that before quitting your job, you’ll know exactly how you will multiply your cash flow.

Using that approach, you’ll have a “formula” to grow your business coming out of the starting gate. Even though the initial cash flow is low, you will least have proven to yourself that your business model can be successful. That will dramatically reduce the risk that is commonly associated with self-employment.

Not Sticking It Out

Winston Churchill once said “Success is about going from failure to failure without loss of enthusiasm.” You’ll have to live by that once you’re self-employed. Creating a successful business is often more of a zigzag pattern forward than it is an elevator ride to the top. You should fully expect that you will meet resistance early on, and that challenges will greet you throughout the future.

The ability to make your business a success largely rests on your ability to overcome those challenges. That means that you’ll have to develop the ability to be flexible, and to think outside the box. For example, there may be times when you will need to consider supplementing your income from outside sources to deal with a dry spell in your business. You may also have to consider adding new products or services, or even partnering with competitors or related service partners as necessary.

If you are prepared to deal with each of these five potential for failure, then your chance of succeeding in your business will increase dramatically. Approach your business with an open mind, test and develop before you open the doors a full-time basis, then be ready for whatever happens. It can work.

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About Kevin Mercadante

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

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