20% of businesses fail in their first year. Here’s how to avoid this fate

According to statistics published every year by the United States’ Small Business Administration (SBA), about 20% of businesses fail in the first year, 50% fail within five years, and only 33% survive by the 10^th year.

These statistics reveal that keeping a business going is not easy. But if you are a current or aspiring entrepreneur, this shouldn’t kill your entrepreneurial spirit. Instead, you need to understand the major reasons why small businesses fail, and learn from the other entrepreneurs’ mistakes.

There are many reasons that can lead to business failure, including a lack of planning, poor margins and inexperienced management. In fact, most people who start companies aren’t accountants, and they don’t understand balance sheets. 

So, we will focus on cash flow problems, which plague many small businesses. For instance, a 2020 survey carried out by WePay for 1,000 small-business owners the United States found that 39% of small businesses spent 5 hours or more per week dealing with payment issues, 18% lost $5,000+ due to slow payments and 25% experienced cash flows problems over the past 12 months.

Here are some of the factors that can cause cash flow problems.

Starting with insufficient capital

A common mistake businesses make is having insufficient funds for their operations. Entrepreneurs sometimes have little knowledge of cash flow and often underestimate the amount of capital they will need to run their businesses. This leads to the closure of these businesses even before they get a fair chance to succeed.

Late payments by larger companies

Late payments by large corporations or government departments have a significant impact on small businesses, which may lead to postponement of hiring or delays in buying inventory.

Long payment terms or late settlement means small businesses need to find other ways to get working capital. Often, this results in borrowing money or using personal savings to keep the business going.

Slow payment not only results in small businesses having smaller cash reserves to invest back into themselves, but also means the critical time that should be spent on growth and development is instead wasted on chasing unpaid invoices.

In such situations, small businesses should focus on improving customer intimacy and encourage prompt payment by systematically applying the Virtuous Revenue Cycle to the 20% of their customers who represent 80% of their sales. That includes communicating clear payment and service expectations, and a carefully maintained process of customer intimacy with early identification of issues and their prompt resolution.

Get more tips on effective cash flow management from our book, Let The Cash Flow. To find out more about how RIABU helps small businesses get paid on time, visit Riabu.com