Common Reasons Why Small Businesses Fail

Running a small business can be challenging. Many entrepreneurs managing small and medium startups must learn critical skills on the job such as how to introduce the product or service to the market, mitigate risks, and offer prices that meet consumer demand.

Research by the Bureau of Labor shows that up to 20% of small businesses close their doors permanently within the first year. Over 30% fail within their second year and up to 50% by their fifth year. Up to 70% of small and medium enterprises do not make it to their 10th anniversary.

While these numbers may seem daunting to a new entrepreneur, there are certain trends that are common among most failed businesses.

6 Common Reasons Why Small Businesses Fail

By studying these trends, you can avoid failure and increase your chances of having a profitable, sustainable business model. Below are some reasons why small businesses fail.

1. Lack of Research

A common problem among small businesses that fail within their first few years is lack of research. As a business owner, one of the first steps to take before starting any business is researching the current and future trends in your niche.

Proper research allows you to map out your vision and come up with a strategy to achieve your purpose. Use this time to learn your competitors, target market, and how to position yourself as a unique business.

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2. No Business Plan

Many business owners have great ideas that do not look good on paper. However, with some research and planning, you can transform your idea into one of the fastest growing occupations across the country.

It is also critical to create a business plan at this point to map out the future of your new venture. Like a map when you are on a road trip, a business plan focuses on your value proposition. This includes:

  • Your target market and the pain points you are seeking to address
  • The distinction between you and your competitors
  • The benefits consumers receive from purchasing your products or services

3. Financial Constraints

One of the major reasons small businesses fail within their first year is financial hurdles. Many entrepreneurs do not have sufficient working capital to pay suppliers, rent, payroll, overheads, marketing, and other bills necessary to keep the business afloat in the early stages.

Failing businesses often have a disconnect between revenue generated and cost of day-to-day operations. An effective business plan will shield you from such eventualities by ensuring you know exactly how much you need to keep your business running.

Another financial reason that might cause failure is offering products at a price point that is far too low. It is not uncommon for businesses that are just starting out to offer their products or services at lower or discounted prices to beat the competition in saturated markets.

To avoid losses, factor in the cost of operations such as production and marketing to ensure they do not exceed the revenue generated from initial sales. Establish a budget for daily operations to ensure that you have enough money to cushion you from the low revenue expected in the initial stage.

If you do not have sufficient funding but have a steady growth trajectory, research your financing options such as venture capitalists, angel investors, or bank loans.

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4. Not Researching Consumer Behavior

We live in the age of social media where customer satisfaction or dissatisfaction is more amplified than ever.

Customers demand and expect quality service and value for their money. They also have the tools to amplify their comments which can significantly affect your business, whether positively or negatively.

Using digital channels can help you monitor consumer trends and learn how to improve your business processes through customer feedback. For instance, more customers prefer online payment platforms over cash transactions even for small brick and mortar establishments.

There are several online platforms that can help you engage directly with your customers and monitor their feedback. They include:

  • Social media channels such as Facebook, Instagram, Twitter, and Tiktok
  • Yelp reviews
  • Google reviews
  • Consumer advocacy sites such as Trustpilot

5. Poor Management

Poor management is another leading cause of failure for small businesses. Most small business owners do not have the experience or expertise needed to manage their new venture. If you lack key management skills, you may not be able to tell when your business is in trouble.

It is important to regularly assess, reorganize, and streamline your business operations. This includes continuously studying the consumer and market trends to ensure that your customers keep coming back.

Business owners who keep learning and improving their skills while on the job have better success rates. Continuous learning also helps you gain critical skills such as:

  • Accounting and bookkeeping
  • How to improve production
  • Sales
  • Business transitions into new markets
  • Hiring practices
  • Employee management
  • Delegation
  • Boosting employee productivity
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6. Not Diversifying/ Failure to Adapt

Businesses across the globe felt the impact of the COVID-19 pandemic. Many businesses closed their doors and countless people were left unemployed. Natural disasters, changes in your personal life, or unexpected economic issues can be catastrophic for a small business.

Learning to adapt to unexpected events makes all the difference between success and failure for small business operators. Always stay ahead of current affairs and ready to pivot away from the norm to accommodate current happenings to keep your business afloat.

If not properly executed, efforts to pivot may also end up alienating your target customers and result in failure.

Use your consumer data to find out what the market needs as you adapt. For instance, during the pandemic, more businesses moved to the eCommerce space to reduce overheads associated with brick-and-mortar spaces. Some entrepreneurs explored remote operations to accommodate staff.

Grow a Successful Business

Running a small business is not easy, but you can make your dream of being a successful entrepreneur come true by learning and avoiding the common causes of failure. Explore your ideas with the help of professionals who can help you draw up solid business plans to ensure success.

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