The Most Common Reasons Small Businesses Fail

No one ever starts a business hoping to fail. We all dream of success and riches.

If only this was a perfect world, then perhaps, that would be the reality. But this world is far from perfect. And if you believe success will come with minimal effort, then you are mistaken.

There are competitors you have to beat. And there are customers who will bargain the juice out of your profit. Then there are issues of making sure that the business itself is running smoothly. Getting all of these things to go in your favor is not easy.

Several statistics indicate that most small businesses fail before getting a taste of what success feels like.

why small businesses fail

If you are aware of the roadblocks businesses face, you can prepare yourself. In this post, I will show you some of the biggest reasons small businesses fail. These are things I have seen in my own businesses and those of others.

So without wasting any more of your time, let’s get started.

Having No Plan

You surely have heard this before. And seeing it here again should serve as a reminder of how important it is. Yet, it’s a simple principle most of us still fail to honor.

We all get in business knowing what we want—profits. So we argue that since we already have an idea of our goal, why bother write it down. Some say their businesses are too small to consider having a plan. And some go on to say they “don’t see how some piece of paper is going to help bring success.”

Unfortunately, all these reasons are wrong. Regardless of how small your business is, you need to have a business plan. And even though you may not realize it, the plan will help you become successful.

no-business-plan-reasons-small-businesses-fail

Without a plan, you will not be clear about where you are going. And this may have you following any strategy that appears attractive at that time; for instance, I have seen small businesses take orders beyond what they are capable of supplying, all because the money is good. The results are failures to deliver (or delivering late), excessive borrowing to buy more stock, neglecting their smaller customers who have been loyal the whole time, and more.

Keeping ideas in your head is dangerous since they fade as time goes. If you put them on paper, they will always be there and you can look at them objectively. You will have a concrete vision of your strategies and goals. And you will know how and where they will take you. When the butterflies come along, they will not sway you to make impulse decisions.

Most small business owners believe that writing a business plan is difficult. Well, that may be true depending on the type of a plan you are working on. But if the plan is just for yourself, then things don’t have to be difficult. You just need the basics to guide you. You don’t have to go for the stereotypical 30-page plan when 2 pages may do.

If you believe your business idea is complex, then you can get help from a business plan writer. This is also a good idea when you want to attract investors or get a bank loan. Just ensure that you are fully involved in the making of the plan.

Poor Finance Management

Money is the blood of every business. If it dries, the business stops breathing and the vital organs freeze, leading to an untimely death.

Before you put up the “Now Open” sign for the very first time, have an estimation of how much money you will need to run your business until it starts making its own profit to take care of itself.

And when starting, don’t get carried away to buy everything you think you will need—only get the basics to keep the business going. You will realize that there is a lot more to buy that if you spend your money at once, you will be out of cash in 2 to 3 months. And by this time, the business may not be generating any profits.

A general recommendation is to have enough cash to keep you in business for at least 6 months. Here is an article to help you determine how much money you need before you start your business.

Poor Management Skills

As a small business owner, you probably do not have the luxury of a full-time marketer, accountant, or any other specialist. So all the crucial aspects of the business fall in your hands. And this can be a challenge since it’s impossible to be a master at everything.

If you have the money, please hire others to help you in areas you believe you are lacking. And this is best done as soon as the money becomes available.

If money is scarce, then you will need to somehow train yourself. You can find free resources on most aspects of managing businesses online. This website is one good example. You can also take business courses on websites like Alison, Coursera, and Udemy. Or you may even pay for a full business course.

Lack of Customer Satisfaction

Regardless of how big or small your business is, customers are the most important thing. They give you money which you want, but only after you fulfill their needs.

Most small business owners underestimate the importance of customer satisfaction. And they throw their hands in despair when they see that their sales are not skyrocketing.

The solution to this is simple—you need to walk in your customers’ feet and identify what it is that bothers them. Solving that problem better than anyone else is the one key to unlocking success.

happy customers bring business success

The very first step here is to identify your audience. You need to be specific about their gender, age, location, status, interests, and other things. From there, you must do research on the reasons these people buy your product (or that of your competitors) and the needs they want that product to fulfill. You should then ask if your product is fulfilling those needs. If you were your customer, would you buy from yourself?

There are lots of ways on how you can do research. Some examples are forums, social media, your competitors’ website, one-on-one meetings with some of your customers, etc.

Just because you think your product or service is great does not mean people will dig it.

Lack of Drive

It takes time to get customers to start buying from you. It also takes time to beat competitors. And it takes even more time for a small business to start making money. During this time, all that energy you had when starting the business can evaporate.

To avoid falling trap to this, you need to keep your expectations realistic. And this is where the issue of business planning also becomes helpful.

You must be realistic with your expectations of when you believe you will become successful. And you must also be realistic of how much profit you believe you will be making. If you are convinced that you will get rich overnight, it may be time for a reality check.

Personal Issues

Personal issues also cause most small businesses to fail. Getting angry with your suppliers, customers, or employees would mean offending people who can help you succeed.

anger-one-of-the-reasons-small-businesses-fail

Many convince themselves that what they do in their lives has nothing to do with their businesses. And needless to say, this is false. If you can’t control your personal spending, for example, you will slowly start taking money from the business. If you go to bed late after heavy drinking every night, don’t expect to be super productive when you wake up.

Entering Sunset Industry

Often times, I see people switching businesses citing they are in a sunset industry. And this happens more often than you can imagine. You should not get into a business just because your grandfather was in the same business. What was hot then may not be so anymore. Do proper research first.

You can start by looking at records of successful businesses in the industry you want to enter. Falling sales on an industry level is usually an indication of decline. The emergence of new alternative technologies that seem popular can also give you some clues. And customers’ comments indicating preference to new technologies can also help.

Underrating Competition

Your competitors, aside from your customers, are also a big deal. And you need good competitive strategies to defeat them, or at least, keep them away from your customers.

Doing competitor analysis is the first step in this process. I have an article on this I recommend you should read. After you are clear on who it is you are against, you can then come up with competitive strategies.

Unexpected Circumstances

Not all is going to be smooth when you start doing business. You may lose your biggest customer (and this can be huge for small businesses), you may have a lawsuit, and many other unfortunate occurrences.

unexpected events make small businesses fail

You need to prepare for such things. When making an estimation of your start-up costs, make an allocation to help against things you can’t plan for.

Do you know any other reasons small businesses fail? Please, share them in the comments. And if you have questions, I would also love to hear them in the comments.

Victor
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Victor

Victor advises new entrepreneurs on how to start and grow their businesses on this blog. He also works as a freelance writer. In his spare time, he likes to read books and watch movies.
Victor
Follow me
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Victor

Victor advises new entrepreneurs on how to start and grow their businesses on this blog. He also works as a freelance writer. In his spare time, he likes to read books and watch movies.

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