Top 10 Reasons Why Small Businesses Fail

The top ten reasons why small businesses fail are as follows: It may be challenging to establish a business, and there are a lot of statistics out there concerning the success rate of startups: just approximately 20% of new enterprises survive their first year of operation.

  • The US Census data reveals that new business creation is almost at a 40 -year low,
  • Within the first five years, around half of all small enterprises fail.

Even if you’re an experienced small business owner or just starting, these statistics can be a little frightening. Fit Small Business does a great job of debunking some of the studies and defining what types of companies are discussed.

It’s important to remember that while these numbers are accurate, they shouldn’t discourage you from pursuing your dreams. If anything, it should help motivate you because now you know what not to do and how other businesses have failed in the past.

There are many reasons why small businesses fail, but these are the most common ones:

why small businesses fail

 

10. No business plan or poor planning

This is especially true for new small business owners because they throw the ropes. What you think will work in theory may not translate to success when put into practice.

This means that you should still listen to your passions and do some research and planning. Click To Tweet

Business plans are meant to make your business stand out from the competition. A good plan should include what makes you different, like food or service style.

Other crucial factors to consider are: Who is your target market? In-store, online, or both, will they buy your product or service? What’s the marketing plan to reach these customers, and how will you find out about them (e.g., through research)? What are cash flow projections like for first-year business expenses vs. living expenses during this period? And finally, what is an estimation of startup capital needed to start a company.

If you are still in the planning stages of your business, answer these questions to help determine what can make it a success.

 

9. Failure to understand customer behavior

why small businesses fail

In today’s connected world, small brick-and-mortar businesses need to accept credit cards and other forms of payment. If you don’t provide this high-quality service, expect your clients to complain loudly about social media. For example, customers are demanding the same level of customer service that they would get from a larger company, even if you’re running an independent shop.

Review sites and platforms make it easy for people to talk about your business, but not always in a good way.

Today, with the rise of social media and all other forms of technology that allow people to share their thoughts on businesses they interact with, it is easier than ever for business owners to monitor customer feedback. This means that any person who owns a company can solicit responses from customers.

Here is a list of the best channels for feedback and customer engagement.

Social media

Today, all social media platforms are great tools for listening to your customers. Social media has made it easier than ever before to connect with the public and have conversations about your company or product. The push notifications that let you know when someone talks about you on these sites make responding quickly more manageable.

Yelp reviews

Yelp is a website where people go to find businesses in their area. With over 148 million reviews, it’s also an excellent way for customers and business owners to see what others say about the company.

Google reviews

Consumers are constantly looking for reviews, and that’s why Google is dominating the review market. Six out of ten consumers turn to Google for reviews.

Dedicated customer advocacy website

Trustpilot is a site where consumers can review products and services. It has 45,000 new reviewers each day who help share their genuine experiences with other customers.

Customer surveys 

One of the finest methods to ask clients precise and straightforward questions is to use surveys. If you collect customer email information at the point of sale, you can use SurveyMonkey to conduct a free survey on how to improve your business. 

85% of consumers say they trust them as much as personal recommendations for online reviews. This is why you should try your best to ensure that the good outweighs the bad, so negative reviews don’t turn potential customers off.

 

8. Inventory mismanagement

why small businesses fail

If you are starting a business, it is essential to manage your inventory. It will lead to more success and minor failure if this aspect isn’t taken care of.

The problem with not paying attention to the intricacies of your sales is that it’s a rookie mistake and one easily made by new businesses. The best way to combat this is through inventory management software or POS systems, which can help you track what sells well to identify patterns in those areas.

If you don’t track your best-selling items or know when they are in high demand, then inventory shortages will lead to a decrease in profits.

When you order a lot of inventory, it’s possible that the items will not sell as quickly as they were forecasted. If this happens, your investment is at risk because there are now unsold products and no way to recoup any money until those goods can be sold.

Imagine that the stock you have is not inventory but rather piles of cold hard cash. However, the product in storage or your local warehouse does nothing to contribute to a return on investment (ROI).

 

7. Unsustainable growth

Most business owners don’t know this, but most successful companies take their time expanding. They are into debt with a loan or other financing options if the market changes or sales are down.

Taking on more business than you can handle will reduce your working capital and take away from the quality of service. You are too overwhelmed to do anything suitable, creating a worse experience for your customers.

 

6. Lack of sales

At the other end of this spectrum, it’s a huge risk to have sales goals and not meet them.

When you rely too much on one customer, it can be risky. For example, if your cafe depends heavily on student traffic during the school year and then summer rolls around, and those students are gone for a break- that could lead to financial trouble.

why small businesses fail

One way to hit sales targets is by using analytics from data collected and those insights as a guide for strategy. 

 

5. Trying to do it all

Small business owners are a tough bunch, and they often feel like they can do it all. But entrepreneurs have strengths and weaknesses and only so many hours in the day.

Hiring employees and investing in software is the only way to grow your business. If you want money, then delegate as much work as possible.

 

4. Underestimating administrative tasks

why small businesses fail

Businesses have to stay on top of a lot, from making sure that customers are happy and their marketing is working well. However, there’s also a large chunk of the business around administrative tasks.

From inventory management to managing employees, bookkeeping and accounting can easily take up your entire day. It is essential to be efficient and time-conscious in the quest for financing goals and profit margins.

A recent poll by SCORE shows that the number one complaint among small business owners is bookkeeping, with 47% of respondents saying they dislike how much it costs. Click To Tweet

The second most common complaint was administrative tasks, and a third said they disliked the amount of time it takes away from their workday.

Hiring employees is expensive, but outsourcing tasks to technology can save you time and money. One example of this is the integrations between accounting software like QuickBooks with tools that allow for seamless data input.

 

3. Refusal to pivot

Even when all evidence leads to a failure, it’s common for entrepreneurs to get fascinated with their company’s concept or product. Old-fashioned stubbornness comes in at #3 of the top reasons small businesses fail.

Maybe two years after opening your store, it seems like the excitement has worn off. But don’t give up just yet! There are many ways to turn things around: Maybe you need to change what kind of merchandise is in stock or bring on more staff members who can be trained as specialists.

 

2. Lack of data

The data that giants like Wal-Mart and Starbucks have at their disposal makes them so successful. They know pretty much everything about their customers.

A smaller market can be challenging to navigate, but you should still gather data about your performance. You need real-time information to make intelligent decisions.

An example of this is when you need to see your revenues and expenses. Without this knowledge, it feels like you are flying blind.

A company’s expenses can quickly become overwhelming, and it is essential to be aware of all expenditures. If you want to buy new inventory or update your storefront, this will impact the bottom line.

As a business owner, you need to know how much of your revenue can be allocated towards employee wages and utility bills to have goals for saving money. On the other side, increasing revenues each month or year is essential.

If you are not meeting your goals, it may be due to overspending. To avoid this problem and ensure that the business stays afloat, review expenses for areas exceeding revenue.

Calculating your net income

The first step in determining your Gross Profit is to take the Cost of Goods Sold and subtract it from Net Sales. You can find reports that detail this information on a POS system.

To find your Operating Profit (OP), you need to subtract operating expenses from gross profit. You can easily retrieve this information with accounting software.

Non-operating expenses are not related to your core business operations and can include taxes or interest on loans. These items subtract from operating profit to get net income.

The key to running a lean business is a long-term strategy that strives for waste elimination and improved efficiency. This will lead to the betterment of your own company and an increase in value delivered to customers.

In contrast to the widely-held idea that a lean business has as few resources as possible, it’s much more manageable. The methodology of build-measure-learn allows for experimentation and learning.

Build

The idea behind the build is that Rome wasn’t built in one day. Nor was Google, Apple, or Amazon. Businesses don’t start out doing all the cool and fancy things they are known for today; these companies started with a basic idea, aka minimum viable product (MVP), which later became what we know them now.

Measure

Next, these companies decided to measure. They measured the results of their MVP during its experimental stage. Evaluate how the market responded to your business or product. Did they react in a way that you expected them to, or was there an opposite reaction to what you had hypothesized?

Learn

When you collect reliable data, it is easy to see your company’s direction you must go. Have the measurements confirmed that you were right all along? Or did they provide some insight into areas for improvement?

Applying build-measure-learn

If you’re looking to start a small business, you must go back and review your original plan. What are the goals of this company? What is necessary for success in terms of capital or workforce?

Real-time data has drastically reduced the lag time between collecting and analyzing data, making businesses more agile. This is important because small businesses have an innate ability to react quickly without going through all of the corporate red tapes.

1. Poor management

why small businesses fail

We’re finally at the #1 reason why small businesses fail. With great power comes great responsibility. This means you have to run your company well and make sure it stays afloat.

Management is about more than just productivity and efficiency—it has a direct effect on your bottom line.

It’s easy to become complacent when you have been in business for a long time. It is just human nature, and it can happen at any point in your life.

When a business is doing well, it can become complacent and assume that what’s working now will always work. That feeling of security makes the company vulnerable to fallacy when they are not careful.


 

Final Thoughts on Why Small Businesses Fail 

You can’t just hope for success in your business.

It would help if you had a clear plan, strategic operations, and sound financial management from the start to make sure you have enough of an income. Click To Tweet

These ten reasons why small businesses fail should give you a solid understanding of turning around your failing small business. Although it’s impossible to avoid every single reason listed above, there are things that you can do preemptively to make sure the company doesn’t become another statistic.

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