10 Reasons Why Small Businesses Fail (and How to Avoid them)

‘Startup success is not a consequence of good genes or being in the right place at the right time. Startup success can be engineered by following the right process, which means it can be learned, which means it can be taught.’

Eric Ries, author of ‘The Lean Startup’

Small companies struggle for a variety of reasons. Starting a company is difficult, and there are several statistics on the survival rate of startup companies available, such as that tust about 20% of new companies make it through their first year of service, or that within the first five years, half of small companies collapse. Those figures aren’t encouraging. Small business survival is much more of a concern last year (2020) due to coronavirus-related revenue declines.

The argument is that, while these figures might have some validity, you should not let them affect your entrepreneurial spirit. Instead, aim to comprehend the primary causes of small business failure. You will stop making the same mistakes as others if you understand their mistakes.

We have compiled the list of some of the main reasons why small businesses fail.

1. No Business Plan

Many entrepreneurs start small businesses based on a product or service they know and enjoy, and many disregard advice to write a comprehensive business plan, believing that their passion and imagination are the most important requirements. Company plans, on the other hand, aren’t the same as classwork. For a small company, a business plan is important. From funding to operations, your business plan will assist you in almost every aspect of your company. You can use your business plan as a reference and checklist during your small business journey if you start early. You’ll research and appreciate key areas for growth with a successful business plan. It must be accurate and focused on actual, reliable data as well as contain informed forecasts for the future.

Your business plan should include the following elements:

• Business model – company description, vision, unique selling proposition, priorities, and success factors
• Market research and market competition
• HR plan and requirements
• Problems and solutions that may arise
• Financial plan: capital equipment and supply list, balance sheet, income statement, and cash flow analysis, as well as revenue and cost forecasting
• Promotional, marketing, and advertisement campaigns
• Managing and budgeting for business expansion

A business plan is also required by most bankers if you are seeking additional capital for your company.

If you are confused or do not know where to start with your business plan, try Planium Pro, a solution that was designed specifically to assist small business owners and entrepreneurs to write business plan quickly and efficiently, it has all the necessary structure, tables, graphs and analytical tools to lay out your path to success.

2. No Market Need

According to CB Insight, 42% of the startups fail because there is no market need. Even the best business plans will struggle if there isn’t a demand for what you’re selling, or if the market vanishes due to economic changes or natural disasters. Although you can’t foresee disasters, you can decide whether there is a demand for what you want to sell and whether that market is large enough to be profitable before you start a company. Remember that ‘everyone’ isn’t a business. The market must be a distinct category of consumers that you can target with the marketing dollars and money you have at your disposal.

Here are some of the most common signs of the problem:

• There isn’t a strong enough value proposition, or convincing case, to entice the consumer to make a purchase.
• The market timing is not right. You may be a few years ahead of your competition, and they aren’t ready for your solution at this time.

To avoid business failure after launch, entrepreneurs must track their demand and customers’ evolving needs on a regular basis.

3. Poor Management Team

Poor management is cited as the number one explanation for business failure in several reports. Finance, buying, sale, production, and recruiting and managing employees are all areas where new business owners often lack specific business and management skills. The company will fail and go out of business if the owner does not realise what they don’t do well and seek help. Small business owners may either educate themselves about the skills they lack, recruit qualified workers, or outsource work to competent professionals to solve the issue.

A bad boss is the reason for 57% of workers quitting their jobs. Another 14% have quit several jobs due to poor management. What are commonly referred to as ‘soft skills’ turn out to be crucial lessons for managers, particularly those who are new to running a company. When you take on a leadership role, you should consider learning skills such as active listening, empathy, motivation, communication, and compromise.

How can you hone your leadership skills? Fortunately, there are many services available to you.

• Online training and courses, such as those offered by LinkedIn.
• Entrepreneurs’ Association is an example of a peer-to-peer organisation.
• SCORE will assist you in finding small business mentoring.

4. Running Out of Cash

The CEO’s job is to figure out how much cash is left and whether it can get the business to a point where it can secure funding or become cash flow positive. New business owners often misunderstand cash flow or underestimate the amount of capital required to get their venture off the ground. As a result, they are forced to shut down before having a chance to succeed. They may also have an unreasonable view of incoming sales revenue.

Keep in mind that cash flow and profit are not the same thing. You can be profitable and yet be cash-strapped. Profit examines the current status of your revenue, including any sales that have yet to be processed by your accounts receivable department. If you ignore the cash flow, you’re missing the money you already have. That’s the money you’ll use to cover day-to-day expenses including paying invoices, bills, and staff.

It’s important to control accounts receivable in order to concentrate on cash flow as a company grows and scales. When businesses struggle to make cash flow changes as they expand, they are more likely to run out of operating capital. And if you’re short on cash, it’s almost impossible to stay ahead of invoices and pay your employees.

5. Unsustainable growth

Overexpansion is a leading cause of business failure. It occurs when business owners conflate success with how quickly they can grow their company. It’s best to concentrate on slow and steady progress. Rapidly growing businesses have been the source of many bankruptcies.

Taking on more jobs than you can manage depletes your working capital and normally leads to a drop in quality. You’re stressed, and the product or service suffers as a result. Instead, choose your customers carefully and plan how you’ll repay each business loan. It’s a necessary part of running a company to be able to say no.

At the same time, you don’t want to stifle growth. Allow your performance to help you set the right calculated pace once you’ve built a strong customer base and good cash flow. Inability to meet consumer needs on a timely basis, as well as workers unable to keep up with production demands, are two signs that an expansion might be necessary.

Conclusion

A successful company is not something that can be left to chance or luck. From the start to the end of your company’s life cycle, you’ll need a well-defined business strategy, strategic operations, and sound financial management.

These mentioned failure reasons should give you a bit of a grasp on how to turn around a struggling small business and avoid being a failure rate statistic. Although you may not be able to escape all of the reasons mentioned above, it is critical to be aware of them and plan ahead of time how you will address each one and emerge victorious.

Other Resources

1. ‘Key Reasons Why Small Businesses Fail’ , by Silas Titus, https://www.summitbusinesssolutions.ws/docs/reasons_biz_fail.pdf
2. Axman, A., 2003, Entrepreneur magazine’s Small Business Advisor, Entrepreneur Media.,
3. Jacksak, S.M., 1998, Start, Run and Grow A successful small business, 2nd Ed. CCH Inc. publishing
4. ‘What is business failure? A philosophical perspective’, Joni Salminen, Qatar Computing Research Institute, https://www.researchgate.net/publication/314134805_What_is_business_failure_A_philosophical_perspective