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Old 09-15-2008, 10:26 PM
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Why do 50% of All New Businesses Fail Within Their First 3 Years of Operations?

Nine Reasons Why more than 50% of Small Business Start-Ups Fail within Three Years of their Operations.

More than 50% of all small businesses fail in their first three years of existence. There are several factors that play a major factor that contribute to a new business’s failure. Some of the most common reasons to cause a new business to fail in their first three years of its operations are as follows:

1.Poor Management.
The main reason why many small businesses fail is because they lack business experience or know-how especially in the realm of accounting, finance, human resource management and marketing. A lack of financial know-how will contribute to a failure into making sound business decisions.

2. Inadequate Starting Capital.
A business needs sufficient working capital to operate smoothly. Not having adequate working capital will limit the financial flexibility of the new business. This will ultimately result in a weak foundation that could be detrimental to the future success of the business.

3.Lack of Inventory Management.
A poor inventory management system is an impediment to a new business because an excessive investment in inventory will tie up valuable working capital. Instead of investing in the core fundamentals of the business that contribute to an increase of sales, excessive funds would be invested in inventory.

4.Incompetent or Non Existent Business Plan.
A business plan is essential for the ultimate success of a new business. A sound business plan should take into consideration the financial requirements needed for the business operations over a minimum of 24 months. In any case, a business plan should be prepared or at least reviewed by a CPA. Not having a business plan in itself is a disastrous strategy, as it will not allow a business owner to prepare for anticipated outflows and capital needs.

5.Not Retaining a Qualified CPA as a permanent Adviser.
A CPA assists in all the aspects of a business, particularly with respect to generating a business plan, preparing financial statements, providing valuable tax and other operational assistance. It is therefore imperative to retain a CPA not just for financial statements and tax compliance needs, but all to serve as a business adviser.

6.Aggressive Expansion.
Having an aggressive expansion strategy can lead to some disastrous business consequences. An expansion is generally a good business goal, but if it is not planned properly, it could consume substantial resources or working capital, in the business. This will lead to insufficient funds for the normal operation of the business and will ultimately lead to business failure.

7. Lack of Financial Control.
If one does not keep check on the disbursements of the funds and lacks internal controls, the possibilities of fraud and waste will greatly increase. These events will ultimately cause the business to fail.

8. Not Retaining Sufficient Profits in the New Business.
Sometimes there is a tendency for business owners to take all the profits out of the business as soon as the business makes a profit. There is no thought of retaining the profits in the business. Most successful businesses have used retained earnings as a primary source of funds, for the purpose of business expansion. Thus, despite the temptation to take out the profits, the business owners should exercise a modicum of restraint. It is vital for the business owners to leave some of the profits in the business especially in the early stages of the new business.

9. Substantially Underestimating the Capital Requirements of the New Business.
Typically, business owners will start a business on the false notion the initial capital that they are investing is sufficient to fund the business operations or pay for the franchise fees. But, in a few months the owners might notice that the business is having a few bad months. However, they have not planned for those poor month’s which may result in a substantial negative cash flow.

Unfortunately, the owners are now in a bind, the banks will not lend them any monies due to insufficient collateral or lack of profits in the new business. Also, the business owners funds are all exhausted in buying the franchise or the new business.

Thus, not having additional capital to fund possible negative cash flows for at least two years are a major contributing factor to the business failure. It is most prudent to plan for a 'rainy day' such as inclement weather, floods and other natural disasters. These natural disasters could substantially affect a new business for a prolonged time, as the business may not be able to contribute any cash flow to the owners.

Therefore, business owners should plan to have sources of readily available funds to maintain their basic life style and pay for their household expenses during those difficult times.

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Ask TaxGuru Please refer to the legal disclaimer.

Last edited by TaxGuru : 09-29-2008 at 08:41 AM.

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Old 09-21-2008, 05:34 PM
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I think some of the reasons include having one of the most challenging economic conditions since the depression. But, I still think the article you wrote covers the most critical issues.

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