Why Some Small Businesses Fail: Top 6 Reasons

According to the statistics, 9% of all American companies close every year, whereas only 8% are opened every year. Moreover, over 50% small businesses fail in their initial 4 years.

For instance, all small businesses that were launched in the year 2011, there were only 4% that made to their 2nd year, 3% made to their 3rd year, 9% made it to their 4th year, and just 3% made it to their 5th year.

With such alarming rates of startup failures, what it is that is resulting in the unsuccessfulness of these ventures? What are the reasons behind the failure of small businesses? Does it have something to do with how they operate or lead the business or is it because they do not have ample capital to invest?

The figures indicate that 46% small businesses do not succeed owing to incompetence, 30% do not work due to lack of managerial experience or unbalanced experience, 13% do not make it because of broad categories like neglect, disaster and fraud, and 11% are unsuccessful due to lack of experience in the line of services or goods.

These statistics can put off any small business owner who is planning to start their very own startup or have already done it a few days or months back. And, if you too are one such business owner, then do not keep down your sword so fast.

As a small business owner, this thought would have crossed your mind sometimes. What if your small venture fails even though you’ve done everything to thrive? And, if you are an optimistic kind of business owner, then you would not have even pondered over this idea. However, as suggested by the figures above, it is a fact that a lot of startups do not succeed.

So, what exactly are the reasons behind startup failures? This article aims to cover this topic for small business owners who fear that their startup can fail or who want to take measures that do not result in a business failure. So, read on and find out the common reasons behind the shutdown of a lot of small businesses out there.

  1. Wrong reason for starting the business

The reason behind launching your startup can be the one behind its failure as well. The reason can be anything. It can be that you want to make plenty of money, spend more time with your dear ones, do not want to work under anyone else and be your own boss, etc. Although these are the perks of a successful enterprise after it has been in existence for several years and owing to the hard work of the entrepreneur, these are not the valid reasons to begin a business.

Forbes reports that over 500,000 companies are launched every month, and most of them have the wrong reasons behind their commencement. Moreover, 42% startups fail because they do not cater to any particular market need or solve any of the problems consumers face. Thus, you should begin your company with the correct reasons so that you can make it successful. Some of these reasons include:

  • Having passion for what you will do
  • The service or product should fulfill a need of the people according to studies and investigations
  • A positive attitude, determination, and drive that does not let you give in when others already have
  • Be willing to learn from your mistakes
  • Getting knowledge of varied business running skills
  • Proficiency at offering intelligent or creative solutions that are required in the marketplace, particularly under stringent time restraints
  • Liking fellow humans and portraying this in your interactions, integrity, and honesty with different types of people
  1. Lack of capital

If the startup does not have enough operating capital, then your small business is surely doomed. A lot of business owners take the dangers of less cash flow too lightly. According to the 2015 report of Hiscox, titled DNA of an Entrepreneur, 21% of American entrepreneurs use their credit cards to finance their businesses.

Moreover, 82% small businesses experience cash flow issues. Nearly 29% small businesses do not succeed for the reason that they run out of cash irrespective of whether they are underfunded or spend irresponsibly.

Furthermore, Hiscox Business Insurance reports that 1/3rd small business owners do not even possess an insurance and 1 out of 3 small business proprietors are sued even without committing a mistake, owing to which they spend a large portion of their capital to fight lawsuits.

Therefore, it is advised that you:

  • Protect your business capital even prior to starting your small business so that you can safeguard it against oscillations
  • Get proper liability insurance in order to manage the flow of capital in a better way
  • Determine the amount of money you require to cover up the costs of your startup and to keep it running for the initial years; for this, you can also make use of a startup calculator such as on The Wall Street Journal
  • Consult a financial advisor and talk about your plans
  1. Poor management

A lot of reports indicate that small businesses fail owing to poor management, which includes relevant management and business expertise in fields like finance, purchasing, production, selling, and managing and hiring staff.

Almost 23% startups are not successful because they do not have the right team. It can be due to a lack of common vision, expertise, motivation, or something else. Nevertheless, if the team is not appropriate, the startup will fail.

19% startups are outcompeted by other startups in terms of funding, motivation, and expertise. Additionally, neglecting the business or the product can also lead to its failure. It is recorded that 17% businesses do not succeed owing to their neglect for their product.

In order to handle your management properly, you must:

  • First, identify that your management is poor
  • Then, educate yourself on the skills you do not have
  • Outsource work to skilled professionals or hire proficient employees
  • Be a successful manager and leader
  • Study, plan, organize, and control all the business operational activities regularly; for this, you need to study customer and market research data frequently
  • Create a work climate that drives productivity
  • Think strategically, make your vision a reality, deal with change, make alterations, and envisage new future possibilities
  1. Improper planning

Not planning properly is one of the other reasons why small firms go out of business. More often than not, entrepreneurs who focus on attaining financial independence do not succeed since they do not take the necessary steps to create a crucial business plan, which includes things like workforce requirements, competitors’ analysis, marketing budgets, and expense and sales forecasts. Reports show that 17% small businesses do not make it since they do not have any business model along with their idea.

A new business requires strategic, methodical, hard work, and careful planning on the part of the business owner; and if these are absent, your small business can fail. According to stats, 18% startups fail owing to poor cost and pricing issues in their product, thus resulting in loss of sales and revenue. Additionally, banks ask for your business plan, when you seek additional business capital.

In order to ensure that your business is successful, you need to plan it properly. It should include all the components listed below:

  • Effective business plan no matter how much time it takes; for this, you can make use of a software that will make your job quicker and simpler
  • Plan ahead regardless of the length of your business plan, even if it is one page
  • Based on educated, accurate, and current forecasts for the future
  • Business, goals, and vision descriptions
  • Staff requirements
  • Market and competitors’ analysis
  • Possible issues and their solutions
  • Promotional, advertising, and marketing activities
  • Keys to success
  • Growth management and budgeting
  • Financial details, including capital, supplies, balance sheet, cash flow and income statement analysis, expense and sales forecast
  1. Poor location

9% small businesses lose out since they are not located in a proper location. A local business should be located at the right place in order to be successful. A poor location can be a catastrophe for a business that is well-managed and a good location can even make a struggling company go on and prosper ultimately.

It is advised that your company should be located in a place:

  • Bubbling with ideas and talent
  • Full with the audience that will use the company’s product
  • That is easily accessible, has parking space, proper lighting, and not much traffic
  1. Overexpansion

It is noted that some small businesses have experienced bankruptcy owing to their quick expansion. This usually happens when business proprietors think that success equates quick expansion of their business. Rather, it is the other way round; a steady and slow business growth is the best.

You should only expand after a meticulous research, analysis, and review. You need to identify the things that you need to add so that your business can grow, such as the systems, facilities, and staff. Only then, your business can develop efficiently. With an expansion, most of your work will be allocated to the staff as well.

You should look for the following signs that indicate toward expansion of a business:

  • Less number of employees as compared to the product demands
  • Inability to cater to customers within a suitable time frame
  • A solid and established consumer base
  • A good flow of cash

So, these are the reasons why most of the startups are not able to sustain in this competitive business world. Learn from these and make sure that your small business works. We have also given advice to small companies in order to ward off the calamity before it arrives.

Photo by Matthew Henry on Unsplash