Are you starting a new business or struggling to get one off the ground? Sadly, approximately 20% of all new businesses are unsuccessful in the first two years! But that doesn’t have to be your reality, so don’t give up hope just yet. In this article, we’re going to dive into the 10 reasons why small businesses fail and how you can prevent that from happening to you.
10 Reasons Why Small Businesses Fail
While some factors will always be beyond your control, such as economic downturns, there are many reasons why small businesses fail to become successful. Here are several strategies you can employ to make sure your small business not only survives but thrives!
Reason #1. Poor Financial Management
Poor financial management can kill your cash flow and make it challenging to pay bills when they are due. Late payments can then result in late fees, penalties, and damaged relationships with suppliers and vendors.
If you have trouble keeping a close eye on your business finances, you can easily pay too much on rent, utilities, and office supplies. Without a proper budget, you may even end up spending more than you can afford, which can lead to financial difficulties down the line.
Solution: Start by creating a budget for your business and sticking to it. Keep accurate financial records to track income, expenses, and profits. This will help you make informed financial decisions and identify areas for improvement.
Reason #2. Running Out of Money
The top reason why most small businesses have to shut down is they run out of money.
77% of small businesses worldwide rely on their personal savings to initially fund their business. But when you need a cash infusion to test the market, there’s only so much your savings can supply.
Small businesses often face cash flow issues after exhausting their savings. It becomes such a massive problem they have to close their doors or go bankrupt.
Solution: Develop a cash flow forecast that predicts the business’ inflows and outflows for the coming months. Keep an eye on account receivables to ensure your customers pay on time. If you sell physical products, maintain optimal inventory levels.
Reason #3. Failing to Pivot
When you cling to your original business idea, staying flexible and adjusting course when necessary becomes impossible, even if you’re making a loss. This is one of most popular reason why small businesses fail. To be successful, all businesses need to be able to adapt to market conditions.
For example, Starbucks originally sold coffee makers, Instagram started as Burbn (a check-in app), and Netflix launched by mailing DVDs before the streaming market made those almost obsolete.
Every brand pivots for one reason: to adapt and survive the changing market conditions.
Solution: Be prepared to let go of your original business idea if your business is struggling or the market is changing. Don’t be afraid to pivot to a new product or service your customers want or even a new business model! Remember what happened to many offline businesses during the Covid-19 pandemic? Many had to move online or add take-out and delivery options. You need to be agile and ready to do something like that.
Reason #4. Ineffective Business Planning
When you overlook the importance of effective business planning, it’s tough to achieve your goals.
Without a clear understanding of your business goals and objectives, it’s challenging to make informed decisions and develop effective strategies for growth.
Solution: Build a realistic plan based on present and future sales projections.
Your plan doesn’t have to be complicated, but make sure it includes the following:
- Business vision, mission, and goals,
- Market research and competitive analysis,
- Employment needs,
- Potential problems and solutions,
- Capital needs for all business operations.
Reason #5. Inventory Mismanagement
Inventory mismanagement is a rookie mistake any small business can easily make. You must learn to find the right balance between supply and desire.
Inefficient inventory management often leads to a significant shortfall in cash flow. You will either end up with too many products or not enough, leaving you unable to meet customer demands. Holding excess inventory can also result in increased storage costs.
Solution: Conduct monthly audits and find the balance between supply and demand to avoid excess inventory, obsolete products, or stockouts. An inventory management software like Freshbooks can help you automate and optimize the whole process.
Pro tip: Implement a Just-in-time (JIT) inventory system to order products as needed rather than keeping large quantities on hand.
Reason #6. No Online Presence
There are about 2.56 billion people worldwide who shop online, and the number keeps increasing. The digital age has forced many businesses to switch from an offline to an online business model.
Online marketing is more cost-effective than traditional methods. You can use social media, email marketing, and online advertising to reach your target audience without dramatically increasing your budget.
Solution: Create a simple website that educates your target audience about your product or service. If you don’t have the time and resources to create a website, simply sign up for a marketplace like Amazon or Etsy and start selling.
Reason #7. Trying to Do It All
Initially, you might find hiring people and trusting them with your day-to-day business operations hard. But to grow, you must learn to delegate.
This is especially common with people who run an online businesses from home.
Don’t try to be a jack of all trades. You can’t be an expert at everything, and you have a finite number of hours each day.
Solution: Delegation is the best technique to expand and protect your business from failure. But remember, hiring isn’t the only solution. You can always outsource or even invest in software that helps automate processes and save time.
Reason #8. Unable to Cope with Customer Expectations
When your business can’t meet customer expectations, it can lead to losing their loyalty and trust. People will switch to a competitor if they think you can’t meet their needs.
Dissatisfied customers might also leave a negative review or worse. They may share their negative experience with their friends and family, leading to poor word-of-mouth marketing and a black mark on your reputation.
Solution: Understand customers’ needs by talking to them and molding your business model accordingly. Providing excellent customer service is vital to meeting their expectations.
Improving customer service can include prompt responses to inquiries, addressing complaints in a timely and professional manner, and going above and beyond to exceed expectations.
Reason #9. Not Hiring the Right People
Most small businesses fail to hire the right talent due to limited resources, a small network, or a lack of hiring skills. This can lead to:
- Decreased work productivity,
- Low employee morale,
- Lower employee retention.
Solution: If you’re not a hiring expert, bring an HR manager on board. Focus on finding candidates who are eager to learn and are a right fit for the job and company culture.
Pro tip: Ensure that you focus on employee retention after hiring.
Reason #10. Fear of Business Failure
Are you afraid to try new tactics or jump on promising opportunities? The is probably the most popular reason why small businesses fail.
If you’re worried you’ll fail, you’ll become overly cautious and avoid taking risks that might help your business grow. All this leads to a lack of innovation and creativity since you will be wary of trying non-traditional strategies and exploring new markets.
Solution: Learn how to embrace failure as a learning opportunity. Look back at your mistakes and identify ways to improve. Maintain a positive mindset and focus on your strengths and accomplishments.
Conclusion
Now that you understand some of the reasons why small businesses fail, there’s no reason you can’t grow a successful business and avoid the hurdles that have knocked down others.
Sure, success isn’t guaranteed, but when you persevere and follow the solutions and tips in this article, you’ll be able to tackle any challenge that comes your way.
The result? A sustainable business that you can build and scale for years to come.
