Top Reasons Why New Businesses Fail

Post it notes on a board representing making a comprehensive business plan

Every successful business starts as a small business and grows with time, effort, investment, and strategic decision-making. When starting a new business, no entrepreneur thinks that their business will fail. However, no threat looms larger on a new business than the threat of failure. Canadian federal government data shows that nearly a quarter of small businesses with 1-4 employees close their doors within the first three years of launch, while over 50% of new businesses don’t reach the 10-year mark.

This does not mean you should drop your passion to start a new business. Instead, you should learn from others’ mistakes and implement strategies designed to set yourself up for success and longevity. In this article, we have listed some of the most common reasons why new businesses fail, to help identify some avoidable pitfalls.

Starting a Business Without a Strong Business Plan

In the excitement of starting a new business, it’s easy to get carried away and avoid making a comprehensive business plan. Most entrepreneurs design a business plan only for the purposes of securing a loan. A dynamic business plan helps you understand the nuances of your industry and align your marketing, financial and operational strategies.

A business starts with a mission statement and vision for the future, and every business activity should work toward these goals. Your plan should be divided into short and long-term business goals and it should answer the following questions:

  • What is your product/service?
  • Who is your target audience?
  • What value will your product/service provide to the customer?
  • How is your product different from competitors?
  • How will you produce your product/service and generate demand for the same?
  • What is the cost involved, and how do you plan to fund it?
  • Do you need a business partner?
  • How do you plan to scale your customer base and operations?
  • Are there more ways to monetize your existing customer base?

Your model is a blueprint of your business that you can use to tap opportunities and mitigate risks. This will help you stay on track and identify what is workable and what is not. You can keep modifying the model as your business changes or your goals evolve.

Launching a Business Without a Proper Financial Plan

Funding and financial planning is an integral part of a strong business plan. For the initial few years, you will need to continuously pump money into the business to set up a strong foundation. If you do not have enough funds on hand, it will be a challenge to survive these initial years of losses.

What is the adequate amount of capital your business needs? This can depend drastically on the business itself, and is where your financial plan comes into the picture.

The financial plan should include a 5-year projection of business expenses and income. It should clearly state the expected cash flow year-over-year. When making predictions, create a range of low to high and try to operate on the lower estimate of revenue, expenses, and losses. Keep the higher range as your threshold, which will help you understand if your business is outperforming or underperforming.

If there is any deviation between the estimates and the actual, have an alternate plan ready in order to adapt. These alternatives could include non-cash arrangements like giving employees stock options or signing a partnership that requires payment in kind.

The financial plan should also dictate the allocation of capital and the right time to reach out for external funding like small business loans and venture capital funding. Remember, external funding comes at a cost and many businesses go bankrupt because they are unable to service their debt. A financial consultant can help you chart out an efficient and realistic financial plan,

Starting a Business Without Marketing And Competition Analysis

Despite having a great product, many businesses fail because their offerings don’t reach their potential customers. If people do not know about your product/service, they can’t purchase it, after all. Further, throwing everything against the wall to see what sticks is not financially sound, especially for a new venture with limited funds. This is where targeted marketing strategies come into play.

There are many ways to promote your product/service, including:

  • Print media such as newspaper, magazines, billboards, and pamphlets.
  • Digital media such as website, email, social media, online video and banner ads.
  • In-person marketing through trade shows, cold calls, TV and radio advertisements, and sponsorships.

But not every medium is apt for every business. You will just burn cash if you spend extravagantly on marketing without looking at the potential effectiveness. An effective marketing strategy is based on four Ps:

  • Product: Where and how can your product/service be used?
  • Price: What price will the customer pay for your product/service?
  • Place: Where will customers look for your product?
  • Promotion: Which advertising channel should you use to reach your target audience?

Another common mistake is thinking that your product/service is superior to that of competitors. Underestimating your competition can impact sales significantly and backfire. As a business owner, you need to focus on highlighting the unique selling point or value of your specific product/service to potential clients or customers.

If your marketing campaign doesn’t convert into revenue, revisit your campaign, and try a different strategy. Marketing is all about trial and error until you find the magic formula that works for your business.

Remember: Failure can be a stepping stone to success

Success and failure are two sides of the same coin. Do not let the fear of failure stop you from following your passion. Taking the time to plan ahead will go a long way to ensuring your enterprise’s success. Partner with experienced financial experts and business consultants and leverage their experience to plan for various situations and make decisions that are best for your business.


Creating organizational longevity for a new venture requires examining each aspect of a business, assessing potential risks, and creating an effective and comprehensive business plan. This is not a small undertaking, but advice from an experienced financial professional can help. Please contact the Chartered Professional Accountants at Edelkoort Smethurst CPAs LLP by calling 905-517-2297 or by contacting us online. Their consulting expertise will help you make the best decision for you and your business.