Here’s a sobering fact. 33% of all small businesses fail within the first two years. By year five, 50% survive. Moreover, a minuscule 33% are active post the 10-year mark.
But that shouldn’t dissuade you from setting foot in the small business space. After all, given plenty of entrepreneurs have recorded their failures, it’s fairly easy to identify and avoid repeating their mistakes.
That said, where should you start? This blog reviews the five most common reasons for business losses and gives you actionable tips on overcoming them.
Five reasons for business loss and how to overcome them
#1. Financial setbacks
One of the most common reasons for losses in business is a lack of cash flow. This occurs when business owners recognise the expenses of running a business but struggle to make the sales to keep the company afloat. Improperly priced products and seasonal fluctuations in sales add to it.
If yours is a new company, such occurrences can quickly put you out of business.
One way to avoid such cash flow issues is to get a business loan from a trusted lender at a low interest rate. This can help you mitigate your immediate cash flow issues.
Have a little more time to arrange cash? Start by preparing a budget. Factor in all aspects of your company’s operations, including income from all the sources and expenses. Remember, you might need to shell out money from your pockets if you cannot arrange funds from investors or other sources.
With this point covered, let’s look at the other factors that cause business loss.
#2. Rapid expansion
Another determiner of business profit and loss is the rate of expansion. Unfortunately, many small businesses expand too quickly, hit a standstill and then face losses. Here’s why.
First, such businesses run into operational clumsiness. The high volume of orders throws off normal operations and generates operational errors. Simultaneously, the company struggles with customer service. After all, there isn’t enough staff to handle customer calls. This makes for a poor customer experience, which in turn impacts demand.
In the midst of all of this, cash flow gets impacted. One the business is spending over the operating credit to fulfil orders. Then after a bad month of sales, it is again in the lurch for funds.
Fortunately, there are several ways to avoid the pitfalls of rapid expansion. Here are a few you should be aware of.
FIrst, determine your growth objectives. Then take a look at the growth trajectory of your company. What do your sales look like? Is your cash flow sufficient? Do you have enough inventory? Is the production speed optimal?
Simply put, you want to ensure your company can sustain growth over a long time.
#3. Lack of business planning
The third most common reason for loss in business is a lack of business planning. And it isn’t surprising why.
A good business plan ensures the business goals are defined, and so is the target market. It also clearly lays out the threats, opportunities, capital needs, and market initiatives. This helps the business ensure the spending is in check and all business goals get met.
However, when businesses do not update their business plans or, worse yet, don’t have one in the first place, they will miss out on growth opportunities and go past their budgets.
This is why entrepreneurs should either be industry veterans or have sufficient guidance from experienced founders when setting up their businesses. This will ensure they have a business plan and the infrastructure ready before launch.
#4. Management issues
Another thing that dramatically impacts business profit and loss is management.
Most entrepreneurs are also top-level executives in their small businesses, especially when starting. Often they don’t have the management skills or the business acumen to run a successful business. Yet they prefer to run the business themselves instead of outsourcing responsibilities. The result? Mismanagement in all areas, from hiring to marketing.
Entrepreneurs should remember to outsource tasks they no longer have time for or are adept at. This helps avoid problems, speculation, business loss as well as business loss.
#5. Bad record-keeping
Philippe Kruchten once said, “If it is not written down, it does not exist.” And that holds especially true for small businesses walking the thin line between business profit and loss.
After all, records are not just a means to document events. They also serve as references to identify the consequences of actions.
For instance, records of everyday financial transactions can give you insights on possible cash flow issues and help you fix them. You could also conduct an in-depth analysis to understand the cause of the reduced cash flow and develop strategies to avoid it.
Similarly, recording customer survey responses can give you insights into current trends and customer preferences. This data, when coupled with market research, can help you make regular projections, which in turn, enables you to measure the pulse of your business.
Whether you’re speculating about business loss or you’re worried about loss in business before entering the startup world, the above tips can help you avoid them.
That said, remember that no matter the kind of business loss, it will reflect financially. The good news is that today you need not look for investors to invest in your business or shell out funds to keep your business afloat. Instead, you can simply apply for a business loan and avail of the funds you need.
Tata Capital offers some of the most attractive business loans in the market. The terms are transparent, the tenure is flexible, and the interest rates are affordable. So, what are you waiting for? Visit the website to learn more about their business loan. Ready to get one for yourself? Apply now!
01 April 2023
5 mins read
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