• Cash flow issues can destroy even a profitable business — but they're easy to avoid if you have the right guidance.
  • To build a thriving business, start with a solid business plan and an automated bookkeeping system.
  • A healthy business needs to provide retirement and healthcare options for its owners to remain sustainable.

If you run a small business, you’ve probably seen the disheartening statistics about failure rates. According to the US Bureau of Labor Statistics, roughly 20% of the companies that started in 2013 failed in their first year, and ten years later, fewer than 35% still stood.[1]

You can beat those odds if you understand the most common reasons businesses fail and take proactive steps to prevent them. Here’s what you need to know.

Mistake #1: Not Managing Cash Flow

According to the Service Corps of Retired Executives (SCORE), cash flow problems may account for more than 80% of small business failures.[2]

Even a profitable business can have a “cash flow heart attack” if they don’t appropriately manage it.[3] When this happens, a company may suddenly find itself unable to make payroll or pay vendors and has to close its doors. 

For example, when a construction company lands a contract, it might not be paid until the work is done. In the meantime, the business has to buy materials, make payroll, and cover its overhead. The contract could be profitable but still bankrupt the company.

Solution: Forecast your cash flow regularly using tools like Cash Flow Insight® or your accounting software. You can also ask your bookkeeper to show you a monthly cash flow forecast.  If you see a problem coming, there are several ways to prevent it:

  • Ask for deposits and interim payments for big jobs.
  • Borrow against your accounts receivable or other assets.
  • Use business credit cards to manage vendor payments.
  • Open a line of credit so you can borrow when necessary.
  • Finance equipment and other durable assets with long-term financing.

Mistake #2: Not Creating a Business Plan

Many entrepreneurs think they only need a business plan if they plan to apply for a small business loan. But a business plan is an important tool that can benefit any business owner. 

According to The University of Georgia Small Business Development Center, some of the most common reasons businesses fail include misunderstanding their market and not building the right team.[4] A good business plan addresses all of these issues and many others.

Creating a business plan helps you think your idea through on every level. You’ll analyze your competition, prepare financial projections, identify your target market, set prices, and figure out how much startup capital you need.

Solution: Find a free template online or in a book that will guide you through the process. It doesn’t have to be formal — handwritten notes in a binder will work. The important thing is to think through all the most critical steps in starting a business. 

Mistake #3: Not Looking at the Numbers

While a shoebox full of receipts might be all your accountant needs to do your taxes, it will not give you any information about how your business is doing.

If you don’t update your bookkeeping regularly, you won’t be able to look at reports like income statements, overdue accounts, and job costs. This data may help you control costs, allocate resources, forecast cash flow, calculate overhead costs, and set prices. 

Solution: If you have dedicated business bank accounts, you can connect them to a bookkeeping app and automatically import transactions and produce reports. Or, if you prefer, hire a bookkeeping service to do it for you.

Mistake #4: Not Planning for Retirement or Illness

Business owners usually don’t have access to employer-sponsored retirement and health insurance plans — tools that are vital to secure the future for yourself and your family. 

Solution: Self-employed people can buy health insurance through industry associations or on the federal marketplace website.[5] Tax-advantaged IRA accounts are a good option to save for retirement. If you have employees, you might also consider offering Health Savings Accounts or retirement accounts to your staff.

Your Bank Is An Ally

A bank that offers a full suite of business solutions can be a great partner to your growing company. At PNC, we take care of our small business clients with services that range from checking accounts and credit cards to cash flow management and financing options. See our services to understand why so many entrepreneurs depend on PNC to help them move their businesses forward.