Top Reasons Why Small Businesses Fail

The business world can feel like the Hunger Games.

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As small businesses enter respective markets, their first goal is to survive. The truth is that many won’t make it. However, from the massive amounts of businesses that don’t keep their doors open for very long, there have been a lot of lessons to learn from to become one of the ones that do. 

According to the Small Business Administration, two thirds of businesses that have employees will survive at least two years. Only about half make it to lasting longer than five years. Within the first year alone, 20% of businesses have to call it quits. 

No matter the industry you’re entering, as a small business, you will have an uphill battle to protect against your fragility. We aren’t here to scare you out of trying. In fact, we want you to finish reading this article, equipped with the knowledge and power to be one of the businesses that defy the odds. 

Reasons For Failure

  • Poor Management: No matter how many people make up your leadership team (at this stage, it could just be you), it has to be buttoned up. This means that decision-making happens in a timely manner, there’s staff to oversee processes and people, and everyone is aligned with the same vision. If you have a partner or executive leadership team, it’s vital that everyone is on the same page. Even if people do disagree with one another, your employees should only be able to witness leaders as being unified.
    • Tips for success: Meet with a mentor, conduct your own research, learn and study how to lead. You can also look to companies you admire and learn about their leadership style and company culture. Ask your team for feedback, as well. 
  • Insufficient capital: A lot of new business owners are unaware about how much capital they’ll need to operate. If you underestimate your funds or misunderstand your cash flow, you may find yourself in a tight spot needing cash. Make sure you have enough cash to cover your costs until your sales will be high enough to sustain the business. 
  • Wrong Location: Real estate’s value is based on location. This, too, stands for your business. Depending on what service and product you’re going to provide, your customer base may exist in different locations. Of course, if you can conduct your business online, then this point can be moot for some. However, many businesses have an omnichannel model – with a brick and mortar storefront and ecommerce. When you sign a real estate lease, you need to make sure that you’re choosing a location with high foot traffic and a community that wants your product/service. You should take the following into consideration when deciding where to open: your target customer, competitors’ locations, warehousing distance, local incentive programs, safety, and the overall community feel. 
    • Tips for success: Conduct market research before opening your first location. If you found an area that you think is perfect for your needs, get on the ground and see how the community reacts to you being there. This could be with a pop-up shop or sampling your product in the community. 
  • Rapid growth: Going too fast can also cause failure. Many new businesses hit the ground running and see success. With the newfound success, they start to over expand and grow too fast. Some major problems can stem from over expanding. Firstly, you may not be able to fulfill customer demand. Additionally, you can over-invest in inventory and overestimate the strength of the demand. Then, if sales begin to cool, you have put a lot of your working capital into stagnant inventory. Both these situations can lead to a shut down.
    • Tips for success: Strategically plan and manage your day-to-day operations. You can find automation and management tools that help to forecast your future sales based on data. With better information, you can make smarter decisions. Keep in mind that you may need to seek more funding even if your business is profitable. 
  • Marketing failures: We’ve touched on this before. You have to invest in marketing to succeed. But, this doesn’t mean throwing dollars to a marketing department with no results. Instead, it requires the adequate management of budgets and campaigns. You need to define your business goals and measures of success, or key performance indicators (KPIs). You’ll use these KPIs to track your success of each marketing initiative.
    • Tips for success: Perform research so that you can invest your marketing budget wisely. Look at criteria like prospect reach, capital needed, and conversions. Take your time so that you can apply realistic projections and targets to track. Importantly, be adaptable. If you see a campaign that isn’t performing as well as you’d hope, fail fast and pivot to try something new. 

The Bottom Line

Every business has their own fair share of hurdles. What works for one may not be the same formula for another. That’s why it’s so important that you understand your market and customer’s needs. The first step for a small business’ success resides in its value proposition. Be clear and communicative about why you start your business and the value you will bring to your customers. 

When you care about your quality and service, you can take care of one of the biggest business challenges – retaining a loyal customer base. Besides this crucial piece of business, you’ll have to maintain strong leadership, obtain the right capital funding, open up shop in the smartest location, grow steadily and oversee your marketing plan closely. 

The SBA’s data has shown that a business’ survival rate is somewhat independent of the economic situation. So, don’t be afraid to start something new if the economic environment is less than optimal. Your small business’ survival is more in your own control than you may think. 

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