You may think frequently seeing businesses open and then close is due to the unstable economy, but this is not always the case. There are many reasons why new businesses fail in their initial, start up stage. Below are the most common reasons why new businesses fail.
Many people underestimate the power a business plan holds. Some entrepreneurs create a plan because they think they need one to obtain funding -- this is the wrong way to approach a business plan. Instead, when creating a business plan you should view your plan as a map to what you want your business to be. Think of the old proverb "If you don't know where you are going, how will you get there?" This is how you should look at your business plan.
By putting your ideas down on paper and developing a professional business plan, you will prove to yourself and your investors that this is not a ďfly by nightĒ business. Rather, this is a venture that has been thoroughly researched and carefully thought out.
Your plan will need to include an overview of what your business will do, its goals and what your strategy is to achieve them, who your competition is, and some information on the industry you are entering. You will also need a comprehensive financial section that includes a sales forecast, income statement, and cash flow statement.
Underestimating how much funding you require to get started is a big reason many businesses fail. This falls hand in hand with not having a business plan properly prepared. Having a professionally prepared business plan tells you how much money you will need to get started and allows you to see how much funding you shall require to remain operational. The business planís Cash Flow Statement and Income Statements will assist you with forecasting these costs.
Some start up costs will sneak up on you when donít expect them. Things donít always work out the way you want it to, but knowing to expect the unexpected is what will get you ahead. Your business plan should include funding contingencies for hidden or surprise costs you may encounter. This doesnít mean you should overstate your budget too much -- you need to be reasonable when accounting for these costs in your business plan. Investors and banks will want to see you have covered every angle, but also that you are not overspending.
When people create a business plan for the purpose of obtaining funding, they will likely put together an excellent plan that ensures investors will believe in the business. Unfortunately, once the business gets started, such a business plan tends to fall under a stack of papers and is never to be seen again.
A business plan is a living, breathing document. It needs to be updated when things changed, and looked at along the way. Your business plan will outline specific goals you will want to attain within a certain time period. It is important to constantly look at what these goals are and ensure you are working towards them. If you are not, why arenít you? What has changed? You need to make adjustments along the way to ensure you stay focused and on the right path.
"Cash is King". Knowing how much physical cash you will need in the first few months of your business is very important for the operation and success of your business. You will likely spend more money in the first few months of operations than you will once your business is established. As such, you need to know how much money will be required to get through the inevitable, initial hiccups.
Proper planning is how you will determine how much cash you will need on hand. One common mistake small business owners make is that they donít want their cash flow statement for year one to look negative. In reality, it is very common for the first year to have a negative cash flow -- it will take some time to build up your account. This is why creating a cash flow statement in your business plan is essential to your success.
Have a business plan prepared professionally to ensure you are not making any of the 4 mistakes listed here. As you can see, doing so will help protect you against some of the most common mistakes. Being well prepared is the best assurance you have of becoming a successful business.