Why Do Small Businesses Fail
Business | Management | Small Business | Strategic Planning

Learn the 10 Pitfalls – Why Do Small Businesses Fail

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Before starting your business, you need to think long and hard of the possibilities of failure and what you need to do to get pass the roadblocks and succeed.

Nearly half of all small businesses fail within the first two years of operation. Understanding why do small businesses fail will help you address these potential pitfalls.

There is a wealth of information on why small businesses fail, but what are the some common factors?

You Started your Business for the Wrong Reasons


Would the sole reason you would be starting your own business be that you would want to make a lot of money? Or maybe that you wouldn’t have to answer to anyone else? If so, you’d better think again.

On the other hand, if you start your business for these reasons, you’ll have a better chance at winning success:

  • You have a passion and love for what you’ll be doing and strongly believe based on study and investigation that your product or service would fulfill a real need in the marketplace.
  • You are physically fit and possess the needed mental stamina to withstand potential challenges.
  • You have drive, determination, patience, and a positive attitude.
  • Failures don’t defeat you. You learn from your mistakes and use these lessons to succeed the next time around
  • You thrive on independence, and are skilled at taking charge when a creative or intelligent solution is needed.
  • You get along with and can deal with all different types of individuals.

Financing Issues

Another common reason for why do small businesses fail is having insufficient funds for operations. Many business owners underestimate how much money is needed and they are forced to close before they even have had a fair chance to succeed.

They also may have an unrealistic expectation of incoming revenues from sales.

It is equally important to consider not only the costs of starting, but the costs of staying in business. It is important to take into consideration that many businesses take a year or two to get going.

This means you will need enough funds to cover all costs until sales can eventually pay for these costs.

Check out our article on “Key Performance Indicators for Your Business”

Location Concerns

If you’re a brick and mortar operation, obviously location is critical to the success of your business and answering the question why do small businesses fail. Whereas a good location may enable a struggling business to ultimately survive and thrive, a bad location could spell disaster to even the best-managed home business.

Some factors to consider:

  • Where your customers are coming from
  • Traffic, accessibility, parking, and lighting
  • Location of competitors
  • Condition and safety of building
  • Local incentive programs for business start-ups in specific targeted areas
  • The history, community flavor, and receptiveness to a new business at a prospective site

External Factors

External factors include new competition, your major client moving out of town, poor weather if you’re a seasonal business, or economic downturns.

They’re often largely out of our control and may be unique to your particular company, but there are often ways to mitigate them.

For example, if you have a seasonal business, such as a landscaping company (at least up here in the cold north it’s seasonal) you could buy a bobcat to provide income during your off-season with snow removal. The bottom line is, have a contingency plan for external factors that could have a negative impact on your small business success.

As a business owner, always looking at this situations from a different point of view can help you avoid a potential business failure or setback.

Why Do Small Businesses Fail with a Lack of Management

Big companies have the luxury of being able to hire several people to get all the jobs done that need to be done, but chances are you’re going to have to do it all yourself, at least for awhile.

That means you’re not only going to have to develop your product or service, you’re also going to have to make financial, accounting, legal, marketing, human resources, and purchasing decisions.

You may do some of these tasks very well, but it’s unlikely that you do all these tasks well, and even if you do, you might want to contact a lawyer and an accountant at the very least.

And, research, research, and research some more, and when you’re done researching, find an expert or two bounce ideas off and give you solid advice.

Many small businesses fail due to poor management. New business owners frequently lack relevant business and management expertise in areas such as finance, purchasing, selling, production, and hiring and managing employees.

Unless you recognize what you don’t do well, and seek help, you may soon face disaster.

Neglect of a business can also be its downfall. Care must be taken to regularly study, organize, plan and control all activities of its operations. This includes the continuing study of market research and customer data, an area which may be ignored by many once a business has been established.

Lack of Planning; Critical Factor to Explain Why Do Small Businesses Fail

Small businesses often fail because of lack of planning.

Let me make a bold statement: the single-most vital part of your business success is your business plan. Why?

Small Businesses Fail

Simply put, your business plan specifically and concretely lists your goals for the next few years. It spells out, step by step, how you’re going to meet those goals, and gives you something to measure your performance against at the end of your business year.

At times small businesses fail because they don’t have a complete business plan. In addition a complete business plan helps you get financing and includes a marketing plan.

I have one more thing to say about business plans. It does very little good to write a business plan, put it in a drawer and never look at it again.

Lack of Marketing

Most small businesses seem to think it takes a lot of money to market their product or service effectively. That’s simply not true.

There are many ways to market inexpensively. You could use direct mail marketing which is as cheap as a stamp, or email marketing, which costs nothing. The point is, you need to get your product or service “out there” somehow.

You may have the best product or service out there, something completely unique from anything else, but what good does that do if nobody knows about it? Insufficient marketing is a contributing factor the question of to why do small businesses fail.

Not Developing Relationships

What do relationships have to do with answering the question Why Do Small Businesses Fail?

The success of your business is in direct relation to the quality of the relationships in your life. Define the key people that can help you grow your business and commit to spend time to develop your relationship with them.

Spend one day a week with your best customers listening, collaborating, suggesting, understanding. Have a relationship between you and your customers; not just a selling relationship.

What you will be offering or selling to customers in five years may change in form or substance to what you’re offering now. Learn from your clients instead of just selling to them.

Clients really appreciate sharing their views and needs with companies will listen. Let the customer create the questions on a survey instead of just giving their answers. A coach can help you to develop a system of learning from their customers and develop relationships.

Without strategic relationships many small businesses fail due to lack of resources and support.

Maintain a Healthy Life & Work Balance

Your free time is the largest ingredient in recharging your batteries to think more clearly and create solutions for a solid future. Maintain a balance between work, play, and family. This is critical for long term success.

We all put in crazy hours on a short term basis to get a hot project done or the product out the door, but if you do this on a long term, regular basis it is a dangerous sign that you are losing perspective.

You need to be able to step away on a regular basis and get your batteries recharged. Have time for your family because if they suffer it is almost a sure bet your business will suffer too.

Plan your free time for the next three months. This is usually the first thing that people eliminate. After you schedule your free time in your planner, get out your scissors and cut the time out of your planner to resist the temptation of erasing, crossing out or whiting out your scheduled free time.

Be a Leader Not a Manager

Entrepreneurs want to grow their business. In order for your business to grow, you must grow personally.

If you don’t give your all or let an inferior produced product go out the door to a client, you are sending a message to your employees that you do not respect your clients or your work. Your employees will adopt that view as well. Set the example of giving the extra effort, pitching in when needed, caring about people, be the best in your particular business, continue your growth curve, and take care of your employees.

Encourage innovation and creation. Give your employees a stake in the future. Once a month, have a meeting where the employees make suggestions on how to improve your product, service, efficiency, or bottom line. Get your employees involved in the productivity game.

Give monetary rewards when the ideas produce increases to the bottom line and positive encouragement for the process. Create an atmosphere where employees are willing and able to talk with you.

The two best sources of information on how your business is doing and how to improve it are your employees and your customers. Pay attention to both.

Small businesses fail may fail when there us a disconnect between ownership and their employees. This leads to increased turnover anda bad reputation. Team members are an extension of the business and should be treated as your most valued asset.

Wrap Up – Why Do Small Businesses Fail

So there you have it—my thoughts on the main reasons why small businesses fail, and how you can avoid becoming a small business failure statistic by developing a contingency plan, consulting with experts, and developing and using a business and marketing plan.

If you are thinking of starting a small business, trust me, I’m not trying to discourage you. I sincerely believe being in business for yourself may possibly be the most rewarding career there is, but a little knowledge can go a long way towards arming you against small business failure.

-To Your Success

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