“Most businesses fail in the first 2 years”

You’ve heard it:  most businesses fail in the fist two years.  Have you ever wondered why?  

The conventional thinking is that businesses fail in the first two years because the capital they have when they start trickles out of the bank account at a rate that exceeds the capital coming in and after two years, there simply is no more money.

But the truth is much more encouraging.  Most businesses fail within the first two years at one of two points:

– They fail in the first year:  this is the time spent earning new business, finding new customers, and more importantly it’s the time spent getting processes in place so that margins can reach their fullest.  A diner needs time to figure out how much fish to order on Wednesday and how many vegetables to buy on Monday so the food doesn’t go bad before it can be sold.  A consulting firm needs time to get contracts, do the work, and get paid.  A wholesale business needs time to market itself to the right segment and earn their trust.   Even with little capital to start, you have about a year to find a “bouyant” level in which to run your business.  Much longer then that and your new venture will be on a path that is not easily reversible. 

They fail in the second year:  this is when the challenges of the first year have been met well enough to keep you in business. What now?  Expansion, growth.  That’s what.  After you work your way to survivability, you have about a year to go from “startup breaking even” to “profitable enterprise.”  True, some companies raise enough cash to survive for half a decade without making a penny, but that probably isn’t you.  Instead, you now have a business that has it’s processes and procedures down pat.  All you need now is significantly more business to scale your operation in a way that if one of the customers you spent the first year woo’ing goes somewhere else, it isn’t the end of the world.  

When you write a business plan, it would be wise to put in some goals and benchmarks for the first two years.  Any longer term then that is a waste of time since your business is going to look a LOT different in 24 months and there is no way to know what changes lie ahead.  But you need to plan out how your going to go from “surviving” to “sustaining” (Year 1) and then how you’re going to go from “sustaining” to “oh boy…we may be on to something here!”.

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