According to numerous sources, including the Bureau of Labor Statistics, 50% of new businesses in the US fail within their first five years.
Of course, if you’ve just started your own small business, this probably isn’t something you want to hear. In those first few months, there’s already so much to focus on and worry about, including the management of cash flow, finding customers, and building a brand – in a way, you don’t want to worry about simply keeping the lights on too!
However, it’s a truth that must be shared, because often, there are ways companies can avoid falling into the statistics.
One of the ways is simply knowing the risks you need to look out for. With this in mind, we wanted to walk through the three largest risks posed to new businesses in their first five years, helping you to recognize where you could go wrong and prepare accordingly.
1) Operational Setbacks
Perhaps the most common reason businesses fail is not the lack of a good idea, but the execution of that idea. Operational setbacks – such as disorganized workflows, inefficient systems, or staffing issues – can easily be the quiet killer of a business, as it begins eating away at the foundations from the inside out.
The problems might seem minor at first, but over time, they’ll cause missed deadlines, unhappy customers, increased costs, and make it nearly impossible to scale.
It’s also worth noting that a lot of the potential setbacks might be out of your control. If you’re operating in a state that regularly experiences natural disasters, then there’s a chance a fire or a storm could damage your office and inventory. What’s more, if an employee is injured on the job, the possible fallout – including downtime due to medical expenses or a following lawsuit – could severely disrupt your operations and put your business at financial risk.
Even the setbacks you can’t control can be safeguarded against, however, especially if you have commercial business insurance in place to cover the costs of repairs, replacement, or any kind of interruption that threatens to derail your company.
2) Financial Management
Any kind of insurance, for that matter, will be crucial to keeping your business afloat and protecting you from unforeseeable events.
However, you still have a role to play in safeguarding your finances. Even with insurance, if you don’t have the skills to manage your finances effectively, your business could still run into serious trouble.
Whether it’s overspending, a failure to track cash flow, or simply mispricing products, there are so many chances to make costly mistakes that slowly drain your resources and threaten your business’s survival. They might not always be dramatic or immediate, but over time, they will compound, leading to a mountain of debt.
3) Market Demand
Lastly, one of the largest risks that could bring down your business is a lack of market demand. You could have the most innovative product or service in the world, but if no one wants or needs it, it’s likely your business won’t survive. This is why those early stages – perhaps the stages you’re in now – are so important.
During this time, you need to be judging your market and make sure you conduct as many surveys as possible. Stay responsive to customer feedback and be willing to pivot if they’re not responding the way you hoped. Flexibility in the beginning isn’t just helpful, it’s an essential part of morphing your company into a business that works and is for the customers, which, at the end of the day, is what it’s all about.
You also need to be looking at your competitors. This isn’t just important to understand what they’re offering, but also to identify gaps or weaknesses that you can capitalize on. If you think there is definitely an audience out there, analyzing your competition will be the key to spotting opportunities and working to differentiate your product from theirs.
Whatever you choose to do, just make sure you have knowledge on your side and you’re entering into a market that actually wants you to be there.