Reasons Why Small Businesses Fail
Business failure isn’t something you want to think about when you start a business. According to statistics published in 2017 by the Small Business Administration (SBA), about one-fifth of business start-ups fail in the first year and about half of all employer establishments fail within five years. Only about one third survive ten years or more.
Those statistics are rather grim. And while there are a multitude of conditions that can result in a business failing, most small companies that go out of business make similar mistakes.
Here are the top reasons for business failure and what you can do to avoid them:
- Starting your business for the wrong reasons
The reason for business failure is often tied to the reason the owner started the business. Is your primary reason for starting your own business the desire to make a lot of money? Do you think that if you have your own business that you’d have more time with your family? Or maybe that you wouldn’t have to answer to anyone else? While those are benefits some successful entrepreneurs achieve after years of hard work, they are not reasons to start a business.
The right reasons for starting a business – reasons that lead to building a successful company include these:
- You have a passion and love for what you’ll be doing, and strongly believe — based on educated study and investigation — that your product or service would fulfil a real need in the marketplace.
- You have drive, determination, patience and a positive attitude. When others throw in the towel, you are more determined than ever.
- Failures don’t defeat you. You learn from your mistakes, and use these lessons to succeed the next time around. Studies of successful business owners have shown they attributed much of their success to “building on earlier failures;” on using failures as a “learning process.”
- You thrive on independence, and are skilled at taking charge when a creative or intelligent solution is needed. This is especially important when under strict time constraints.
- You like — if not love — your fellow man, and show this in your honesty, integrity, and interactions with others. You get along with and can deal with all different types of individuals.
- Poor Management
Many a report on business failures cites poor management as the number one reason for failure. New business owners frequently lack relevant business and management expertise in areas such as finance, purchasing, selling, production, and hiring and managing employees. If the business owner doesn’t recognize what they don’t do well, and seek help, the company may fail and go out of business. To remedy the problem, small business owners can educate themselves on skills they lack, hire skilled employees, or outsource work to competent professionals.
- Location, Location, Location
Your college professor was right — location is critical to the success of most local businesses. Whereas a good business location may enable a struggling business to ultimately survive and thrive, a bad location could spell disaster to even the best-managed enterprise.
Some factors to consider:
- Where your customers are
- Traffic, accessibility, parking and lighting
- Location of competitors
- Condition and safety of building
- Local incentive programs for business start-ups in specific targeted areas
- Lack of Planning
Anyone who has ever overseen a successful major event knows that were it not for their careful, methodical, strategic planning — and hard work — success would not have followed. The same could be said of most business successes.
It is critical for all businesses to have a business plan. Many small businesses fail because of fundamental shortcomings in their business planning. It must be realistic and based on accurate, current information and educated projections for the future.
Components should include:
- Description of the business, vision, goals, and keys to success
- Market analysis
- Work force needs
- Potential problems and solutions
- Financial: capital equipment and supply list, balance sheet, income statement and cash flow analysis, sales and expense forecast
- Analysis of competition
- Marketing, advertising and promotional activities
- Budgeting and managing company growth
A leading cause of business failure, overexpansion often happens when business owners confuse success with how fast they can expand their business. A focus on slow and steady growth is optimum. Many a bankruptcy has been caused by rapidly expanding companies.
At the same time, you do not want to repress growth. Once you have an established solid customer base and a good cash flow, let your success help you set the right measured pace. Some indications that an expansion may be warranted include the inability to fill customer needs in a timely basis, and employees having difficulty keeping up with production demands.
If expansion is warranted after careful review, research and analysis, identify what and who you need to add for your business to grow. Then with the right systems and people in place, you can focus on the growth of your business, not on doing everything in it yourself.
- No Website and No Social Media Presence
Simply put, if you have a business today, you need a website and a social media presence. Period. At the very least, every business should have a professional looking and well-designed website that enables users to easily find out about their business and how to avail themselves of their products and services.
If you serve local customers, your website should include your address, phone number and hours of operation, and should be listed in Google My Business so it will show up when shoppers search for what you sell by location. Even if you don’t have customers come to your place of business and/or you get most of your business through networking and referrals, you need a website so potential customers can research your business before they call you. If you don’t have a website and your competitors do, you’ll lose out.
You need to have social media profiles on the services your clientele are most likely to use for the same reason. If you don’t, you won’t look professional and will lose business to competitors who do at least have profiles on popular social media sites.
When it comes to the success of any new business, you — the business owner — are ultimately the “secret” to your success. For many successful business owners, failure was never an option. Armed with drive, determination, and a positive mindset, these individuals view any setback as only an opportunity to learn and grow. Most self-made millionaires possess average intelligence. What sets them apart is their openness to new knowledge and their willingness to learn whatever it takes to succeed.
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