Why Do Small Businesses Fail?

Why do small businesses fail

Do you know someone whose seemingly thriving startup business hit the dirt? Perhaps this happened to you instead. Why do small businesses fail?  Why does an apparently promising small business suddenly close up shop?

Opening your own small business and starting out on the journey you’ve always dreamed of, can be one of the most exciting times in a person’s life.

Unfortunately, the reality is that the vast majority of small business ventures end in failure.

While this can be a terrifying truth for anyone starting out on their own, taking advantage of the information out there and learning everything you can about why these businesses fail and what you can do to avoid it can make a world of difference.

Here are the principal reasons why businesses often fail.

Keep an eye out for each and every reason so that you are fully prepared ahead of time to prevent things going south.

No Solid Business Plan

Failed small businesses

One of the biggest and most important reasons why many small businesses don’t even get off the ground is that they don’t have an effective business plan in place.

Being passionate about something and having a vision isn’t enough to build a successful business.

You need to be able to create something that fits well into the market and solves a problem that is currently being ignored.

Make sure you take the time to do adequate research on both your product and the industry you’re heading into.

Who are your target customers?

What is their current financial situation?

The more knowledge you have in a subject, the better prepared you’ll be for when things start heading in a direction you weren’t expecting.

Lack Of Uniqueness

Failed businesses

To run a successful business, you need to constantly offer clients something that they’d never be able to find with anyone else.

This unique approach to your product and business will be the key to your success.

Make sure you understand what fully separates you from your competitors.

What makes you stand out amongst the crowd?

When you can fully grasp that and make sure to capitalize on it, you’ll be sure to bring in large amounts of clients who need your product.

Shape your brand around what makes you unique or you’ll just fall in line with a large amount of competition that’s already out there.

Not Enough Demand

Another serious issue that many small businesses face is a lack of demand for their particular products. Why businesses fail

To be a successful company, people need to want what you’re trying to sell.

If there’s no demand for your business, then you can’t ever expect it to thrive.

It’s incredibly important that you do the necessary research and even question potential clients about whether or not they’d use your product and be excited to see it come into the market.

If you’re receiving a less than enthusiastic response, then it might be time to reconsider your options.

Maybe you just need to rethink the design or layout?

Perhaps this product simply won’t sell or be useful to the market base around you.

Whatever the cause, be aware of this demand long before you commit to opening the business.

Poor Accounting

Business failure

All too often people think that they can rely on their passions to push them through the business world.

Many small business owners find themselves feeling immediately overwhelmed by the amount of financial knowledge they really should have had before they opened up their business.

The fact of the matter is that if you can’t control your accounting, there’s no way you can successfully control your business.

If you know that you’re bad with numbers, make sure you find someone that you can trust who can handle that part of the business for you before you open up.

Otherwise, you’re essentially setting yourself up for failure from the get-go.

However, even when you have someone working on your accounting for you, you’ll still need to be constantly aware of what the numbers are and why they look that way.

Not Having A Cash Cushion

Reasons small businesses fail

One of the most common reasons for small businesses failing is their lack of having a cash cushion for when things go back down.

Many businesses take their current success and think it will last forever, spending all the money they make initially to improve and grow the business.

Thus, leaving them little to nothing to cover themselves with when the economy starts going south.

The economy is a cyclical thing, and so you can almost never expect your sales to remain on a constant uphill journey.

You need to make sure you’re ready to deal with those negative times by putting the money away when you have the opportunity.

Only then can you guarantee you’ll be able to weather even the worst storms.

Fast Overspending

Small business failure

In the same vein, many small business owners become overexcited by the sudden success they feel after opening and they’ll quickly decide to invest in unnecessary luxuries much too soon.

They see the income coming in and start spending more and more money thinking that the return on investment will adequately compensate.

However, this is very rarely the case, and if your business is just starting out the reality is that you’d be much better off holding onto whatever money you can to save up for the necessary expenditures later on.

If you have trusted mentors in your life, take advantage of them.

Ask for their opinions before you make any sort of massive purchase.

Their years of experience will help determine whether or not something is worth it at the point you’re currently at.

Closed Minded Ownership

Reasons for business failure

One of the biggest reasons that small businesses fail is the owner’s inability to change their ideas and adapt them to the current market.

Owners who can’t open up their minds to new possibilities are condemning their businesses to failure.

These kind of business owners are often easy to spot due to their stubbornness, their need for perfection, their greed, and even their self-righteous attitude.

Make sure you keep yourself in check and remember that even you can make mistakes and that taking new ideas and concerns into consideration isn’t giving up.

In fact, making necessary changes is part of owning a business, so you might as well get used to it at the start.

Failure To Listen To Customers

Failed startups

When clients don’t feel valued or considered, it’s highly unlikely that they’ll want to visit your establishment or purchase your product.

One of the key factors in being a successful business owner is your ability to listen to what the customer says they want or what they feel isn’t working.

Even if you don’t agree with them, taking their opinion into consideration will be incredibly important.

Eventually, you are creating a product that must be sold to customers.

If you aren’t understanding and living up to the expectations of those customers, then they’ll have no reason to come back and purchase what you have to sell.

One of the best ways you can get access to this feedback is by taking advantage of social media.

Send out surveys through your profiles, then watch and see the kind of responses you get.

Additionally, review sites such as Yelp and Google can give you a much clearer idea of how clients view your business.

They’ll make sure to critique everything from customer service to the packaging on these sites, so make sure you’re constantly taking a look.

Bad Management

Why companies fail

Success in business comes from the top.

If your business is poorly managed, there’s just no way you can ever expect it to be a success.

When you don’t have good leaders in your business, poor decisions can be made.

A lack of consistency in care and quality can quickly lead to customers leaving your business behind.

As this kind of failure starts at the top, it trickles down to every part of your business and eventually leads you on a downward spiral.

Make sure that you equip yourself with skills that continuously improve your leadership abilities.

In addition, also bring in a quality management team that you can trust.

When you can feel confident that they’ll be able to oversee everything to the same high standards that you would yourself, you can rest easy knowing your business will be in the best of hands.

Excess Overhead

Why businesses go out of business

One serious issue that many small businesses face is a tremendous amount of overhead that they just can’t keep up with.

When you’re paying so much money in rent, electric, payroll, water, and every other necessary bill that you can’t take in any sort of profit no matter how hard you try, you’ll never be able to succeed.

A business needs to see consistent growth in its profit.

You can’t consider yourself successful just because you’re able to pay off your bills.

Make sure you take the time to consider all the different bills you’ll need to pay before you set a price for your product and open up a business.

Your prices need to balance out your expenditures, so make sure you have a firm hand on what you need to get done.

Poor Management Of Inventory

Major reasons for new business failure

When things aren’t going well in your business, and you have unreliable people working underneath you, one of the most devastating things to a business can be the mismanagement of your inventory.

When you over-order a particular material and find yourself sitting on boxes and boxes of something you barely use, you’re losing money every second that goes by.

On the other hand, when you lack a particular material you require to successfully run your business, you’ll need to quickly find an alternative.

This alternative could cost you tremendously, or you’ll need to try and make do without it, which also could lead to devastating results.

Bad inventory counts might seem like a simple mistake, but it can quickly have dramatic effects on your profitability, especially if it goes on for too long.

Poor Choice of Location

Factors of small business failure

The space in which you choose to place your business can have a huge impact on your success.

Just because a place seems to be the most affordable doesn’t mean it’s the best choice for you.

There are a number of factors that you need to take into consideration when choosing a location.

Such include, foot traffic, access to parking, nearby competition, general accessibility, upkeep of the building, the price of rent, etc.

If you are trying to sell a larger product, for example, refrigerators, then you don’t want to invest in a space that has absolutely no access to vehicles.

How will people ever be able to load what they’ve purchased into their vehicles?

Make sure you find a space that will fit your every need before you commit to any sort of lease.

Declining Market

Causes of small business failure

While this might be a factor that’s outside of a business owner’s control, it’s still something that has a tremendous effect on their success.

When a market starts heading downwards, and people are spending less and less, many small businesses, particularly those selling more luxury products, tend to fail.

This is why it’s important to consider current economic trends before you open up your business.

If things seem to be heading down into a negative slope, it might be best to reconsider your timing and put off your opening for a bit.

Better to get a steady paycheck during this time and keep your own business in the planning phase, rather than trying to start out when no one is interested.

Ineffective Marketing

Primary causes of business failure

Your marketing strategy will be a key factor in the overall success of your business.

If you aren’t able to find marketing strategies that work for you, you’ll never be able to bring in the clients that you need.

When it comes right down to it, customers can’t buy from you if they don’t know you’re there.

One of the most important marketing factors in today’s world is online.

Many customers today use the internet as their first interaction with a business and it forms their main impression of what you have to offer.

If you have a beautiful and well-organized website, as well as a booming social media page, they’ll assume that you’re a business that’s worth taking the time to check out.

Make sure you invest in this crucial form of modern marketing, particularly if your business is targeting a younger crowd.

Lack Of Data

Why new businesses fail

Another reason that many small businesses fail, is that the owners don’t place enough importance on receiving the necessary reports that they need to fully understand how their business is doing on the whole.

Only when you have all the information can you really make successful decisions that will lead your company down the right path.

Real-time data collections and reports can make a world of difference in how you view the current situation your business finds itself in.

Small businesses have a distinct advantage that they can make fast changes, should the need arise.

But, too few of them make these changes simply because they don’t realize how necessary it actually is.

Stay on top of your business in every way so that you can always be sure of where you stand and what needs to be addressed.

Underestimating The Competition

What causes a small business to fail

When small business owners simply assume that they’ll be the best, it often leads to devastating results.

You need to remember that you’re a small fish in a big sea.

Also, note that there is a tremendous amount of competition out there that could easily offer just as much as your business does with better customer service or better quality products.

Never underestimate the skills and talents of your competition.

By constantly challenging yourself to keep up with the best of the best, you’ll be able to quickly drag your business up to the top right along with them.

Why Do Small Businesses Fail Infographic

Why do small businesses fail infographic


Why small businesses fail

This might be a more difficult thing for business owners to see directly and address.

Nonetheless, having a complacent mindset can be one of the most devastating reasons for a business’s failure.

When business owners see that they are starting off successful, many become too complacent much too quickly. This in turn ultimately results in their failure to strive for newer and better things.

As such, other companies are given the opportunity to overtake them and push them out of their leading position.

Thus ending with the business failing completely.

When you decide to open up a small business of your own, you need to understand that there’s simply no way to guarantee your success.

Why do startup businesses fail

However, making sure you’re aware of the traps and pitfalls that have been the main reason for the failures of other endeavors will help you to protect yourself against these issues.

Keep these failure factors in mind and start your business off on the path to success today.

Do you know more factors that could contribute to the failure of small businesses in addition to the ones above?

Leave us a comment and let’s share your knowledge!

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