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Beginning the journey of entrepreneurship is thrilling and challenging. For a startup owner, the desire to succeed is paramount. Yet the reality is that about one in four U.S. businesses fail within their first year of operation, according to the latest data from the U.S. Bureau of Labor Statistics.
Being a successful business owner requires knowing why startups fail and how to avoid a similar situation. Here are the most common factors that contribute to business failure, the essential financial milestones for a startup business, and practical financial management tips that will help you mitigate risk.
Four Reasons Startup Businesses Fail
Entrepreneurs say one of the main challenges is “the money running out.” There are four key issues that contribute to business owners not having the financial resources they need during their first year.
Lack of access to capital
Insufficient funding can cripple your startup's ability to grow and adapt to market demands. Adequate capital is essential for sustaining operations and seizing opportunities for expansion.
Lack of market research
Without a comprehensive understanding of target markets, you risk developing products or services that fail to resonate with consumers. Thorough market research is crucial for identifying market needs, understanding competition and crafting effective business strategies.
Absence of a business plan for startups
A clear and robust business plan serves as a roadmap for guiding the direction of a startup. A business plan gives you direction, helps allocate resources effectively and identifies potential challenges. Your business plan also helps guide the conversation with a commercial banker to learn the types of financial services your business would benefit from.
Not investing in marketing
Word of mouth is a valuable marketing tool. However, it is not sufficient on its own to sustain a business. Diversifying your marketing efforts will help drive sales. Whether you take the lead on marketing strategies or tap into an agency, creating great content for your website and social media platforms will help you reach your target audiences and grow your customer base.
Financial Milestones for Startup Success
Now that you know why a small business might not be successful, let’s focus on the financial milestones you can use to measure progress. Every business will have some of its own milestones, but here are four that every startup business should strive for:
- Breaking even within the first 12 months: Achieving break-even status is when your startup is generating enough revenue to cover its expenses and debts. This milestone is an indicator of financial stability and viability.
- Achieving 1.20:1 debt service ratio: Once you have achieved break-even, exceeding your debt service by a margin of at least 20% demonstrates financial resilience and positions your startup for sustainable growth. This milestone is good to strive for during your second year of business.
- Establishing a salary for yourself and hiring employees: The ability to pay yourself a salary and potentially expand the team is a big milestone to celebrate. It indicates that your business is generating enough revenue to support its operations and current and future employees.
- Reaching targeted financial goals: Whether your goal is to reach $500,000 or $1 million in revenue, reaching a financial goal will provide a foundation for future growth and expansion.
Financial Planning for Startups
Once you have determined your financial milestones, you need to begin taking the steps that lead to effective financial management. Following these best practices will help you navigate the financial landscape for your startup business.
Develop a comprehensive business plan
A well-thought-out business plan, including a strength, weakness, opportunities and threats (SWOT) analysis, provides a roadmap for strategic decision-making and resource allocation. Think of it like a sport: Any successful coach will have their plays mapped out and then will execute them in a certain way to win. You should do the same for your business. Here are some of the key items you should include:
- Background information including job history, industry specific experience, skills that will attribute to success.
- Detail around products and services, price points expected, and third-party vendors
- Who your key partners will be. This can include accountant, mentor, attorney and commercial banker
- Timelines incorporated throughout the plan to have a guide for reaching goals
Estimate project costs
Identify and calculate the costs associated with launching and operating your business. Include one-time expenses, such as equipment purchases, and recurring expenses like rent and utilities. Estimating your startup costs is critical for budgeting and cash flow management. Cash flow is the heartbeat that keeps everything running smoothly. Having a positive cash flow provides you with the resources to achieve your financial milestones.
Explore loans for startup business
It’s important to know the small business loans available to startups. Meeting the daily expenses of a new business can be challenging, especially in the beginning as you work hard to turn a profit. The U.S. Small Business Administration (SBA) works with banks and other lenders to guarantee up to 85% of the loan amount they issue to a startup. This lowers the risk for banks and allows them to work with business owners they may otherwise have to turn away.
Build a strong relationship with your commercial banker
One of the best things you can do is work with a commercial banker who understands your business. They are a valuable resource and ally in navigating the financial landscape and providing guidance and resources to support your business goals. Commercial bankers offer a variety of services, products and tools that can help with cash flow management and efficient operation. They can also connect you with additional resources and subject matter experts that are vital to getting a new business off the ground.
Navigating the path to startup success requires careful planning, strategic decision-making and effective financial management. By understanding the factors that contribute to business failure, targeting clear financial milestones and implementing sound financial practices, you can position your startup for long-term success.
To learn more about how Northwest Bank can help support your new venture, contact one of our commercial bankers today.
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