Why Many Businesses Fail in the First Three Years

Establishment of business inclusion project in multi-ethnic communities is designed to help potential entrepreneurs start up their companies and helps them survive their critical period with a combination of suitable mentoring courses. The project is supported by the British Embassy and implemented by Strategic Development Consulting – Skopje. At the beginning of the project implementation, we realised that many of the potential businesses have sustainable business ideas but often they lack the skills to make it work. Some of the potential entrepreneurs overestimated their skills and future success and other feared future outcomes. In order to help entrepreneurs overcome future uncertainties we identified the most common reasons why many businesses fail at the beginning of their lifecycle.

When individuals come up with some business idea they are excited to implement it, so they start up their own company, but unfortunately many of them will fail in the first three years. There are many reasons to fail but the most common are: no business plan, avoiding outsourcing and mentorship, running out of money, and some external factors as well. Entrepreneurs have to understand above mentioned reasons, and work on prevention.

The most important reason for failure is no prior business planning. We all have many business ideas, but not all ideas are executable. The only way to know if our idea is worth something is through business planning. For better understanding the importance of business plan we can compare it with the engineering plan of a bridge construction. Initially, engineers make field study to determine the structure of the ground, the length and seasonal cycle of the river, the material needed for building the bridge and etc. If they miss any of those steps disaster could happen any minute. It is same with the business planning, businessmen need plan same as engineers. If businessmen miss any step of the business plan the disaster is inevitable.

Moreover, small companies’ managers tend to do all tasks by themselves and refuse to outsource and rarely use mentors for further developing their knowledge. They cannot be experts at everything, some small companies’ managers are good engineers while others are good at marketing. They have to do only the things that they are good at, everything else should be outsourced. Furthermore, mangers are usually stuck with their “grand mom recipe” and refuse to improve it in accordance of their customers’ demands. Every successful business men should possess the ability to recognise their weak spots and attend mentorship programs.

Lots of the small businesses don’t generate steady profit through the year, some months are better than others. Startup companies’ managers don’t make distinction between their company profit and their salary. They withdraw the profit in good months, which results with cash deficiency in bad times. In order to have successful business, managers should set their salary lower for the first year, compared to same position they would hold as employee.

As we mentioned previously, one of the main causes of failure for the new companies is running out of money. Sometimes the reasons might be internal, but usually the problem comes from external factors. There are many small companies but only few are big and influential on the market. Big companies buy goods and services via invoice, which never get paid before 3 months, and in some sectors goes up to 6 months. Small companies don’t have any influence and are easily replaceable. In theory they could prosecute their customer and demand payment after the invoice validity date but in practice that rarely happens. Small businesses’ managers should take into account this problem and make prior planning to see if they have enough money to fulfil big company’s demand. Small companies have to make sure that they can keep running their business for six months without any cash inflow.

Startups need prior planning and constant improvement. Entrepreneurs tend to misjudge the importance of planning and improvement, which is expensive mistake they make. Successful individuals don’t gamble with their business, they work hard and get invested in it. If startups find any of the above mentioned causes of failure familiar, they should reevaluate and start from beginning. After all people make mistakes, but according to Dale Carnegie “the successful man will profit from his mistakes and try again in a different way (Dale Carnegie)”.

M.Sc. Cvetko Stavreski Junior advisor for marketing and sales, Strategic Development Consulting Skopje, Establishment of business inclusion project in multi-ethnic communities