8 Reasons Why Small Businesses Fail – Avoid them

small business mistakes, small businesses fail

The fantasy of being an entrepreneur tempts thousands of entrepreneurs around the world to launch startups every year. According to GEM, more than 100 million businesses are launched every year around the world. In other words, three startups are born every second. That sounds promising for the startup world.

On the flipside, there is a big chunk of small businesses that fail after a time. Insurance Quotes has some interesting facts regarding the failure of small businesses. According to the website:

  • There are 28.8 million small businesses in America which make up 99.7% of all businesses in the country.
  • 20% of all businesses fail within the first year, 34% within the second year, 50% within the fifth year and 70% within the tenth year.
  • Higher burn rate, low market demand, and cash flow problems are among the top three reasons behind the failure of the majority of small businesses.

Being myself a student of business management, I’m keen to know more than the statistics above about why a business fails.

In fact, just an hour ago I was thinking how to write my essay on business management and I was struck with the idea of why small businesses fail and I rushed to my workstation to write a post on it and here I am with the roundup of the mistakes that cause a business to crumble. Here they are:

1. Failure to Learn About Your Target Audience

Your target audience is the people who are going to use your product or service. More importantly, they will be the people who will be spreading “word-of-mouth” publicity of your products. So they will be your secondary source of marketing as well.

When you keep a blind eye on the needs and wants of your target audience, it leads to low customer satisfaction, higher complaints, and more refund requests. The cumulative effects of such issues result in an unsatisfied audience who don’t want to buy from you.

To woo your audience, you need to come up with a product idea that makes you stand out from the competition. It should be something that can solve the existing issue of your target audience. At the same time, your product should be under the buying power of your audience. In-Depth market research can help you in this process.

2. Lack of Financial Management

Finances are a key factor in running a small business. In fact, 29% of small businesses fail because they run out of cash. Too often, the finances of small businesses spin out of control as a result of extravagant spending and failure to save any reserve funds for a rainy day.

Remember that when you are running a small business, there will always be highs and lows in your business. Lacking insufficient cash at the crunch time can put a dent on your small business. To avoid facing the music of high burn rate, you need to save money for financially difficult time so that you don’t panic in the crisis.

6 Financial Management Tips for Small Business Owners

3. Incompetent Leadership and Management

Failure of a small business is also a result of complacent leadership and management team. People in leadership and management are the one who carries the maximum responsibility in an organization. They are the ones who give it the right direction and build the character of an organization. From making a business plan to hiring staff, they have the right business acumen to take the right decision at the right time.

Nonetheless, there is a time when the chips are down. It is no different a story than life. Not every day is a good day. Not every turn is easy. There will be bad days, and there will be challenges. However, just like you carry on life despite all the odds, you need to be steadfast in tacking the challenges that affect your business.

Remember that your business is like your child. He needs your constant support, care, and nourishment to stand up against the harsh time and to build a good team of management can help you achieve this goal.

4. Failing To Retain Employees

Lacking an employee retention policy is one of the major reasons small businesses fail. Often, small business owners don’t give the due attention to their workers which cuts the communication bridges between the two and they move to other organization.

Your employees are the valuable assets that you don’t want to lose. The collective talent and skills of your workforce are your best resources to scale your business. So when they leave your organization to join another company, they become your liability.

The best way to keep your star employees on your side is to give them a sense of trust so that they give their best in their job. You have to put your faith in them and let them experiment with different ideas. At the same time, you should invest in their skill building and personality development so that they can excel in every aspect of their job.

In addition, you should take good care of your employee and acknowledge their contribution to keeping them in high spirits.

5. Aggressive Business Approach

I’ve read many stories of startups that were shut down due to their aggressive approach to scaling their business. When you are in the startup affair, you should take up things in stages. The first 6-12 months are crucial for your business, and you have to build a course of action for every move in that span of time.

Don’t rush to hire new employees or open a new business unit unless there is a need for it. It will only add to the financial weight of your small business. Instead, you should take your time and wait for the right time to make the right move.

6. Underestimate the Competition

Taking your competition lightly is one of the biggest blunders you can commit when running a small business. When you enter the startup world, you will be competing against the Titans who control a specific industry. They’ll have higher salary packages and better prices than your business. So there will be employees who will part ways and the clients who will change loyalties. But, you have to be steadfast and keep moving towards your goal.

Unfortunately, many business owners fail to analyze the market under the delusion and mess up things. Therefore, before you jump into this world, you need to have the right information in place to help you analyze the strength and weakness of your competitors and explore the market trends. In technical language, we call it competitor analysis. It will empower you to make more calculated decisions regarding your business and help you forecast the future trends.

7. Having No Business Plan

In the past, many businesses failed because of a lack of a plan. Without a plan, you’ll lose sight of your goals and divert from your direction. However, more than a plan, it is the process that makes the difference. A good business plan sets the right course for your business journey.

With the availability of analytics tools and metrics, you can easily get the hard data to help you forecast your finances, predict market trends, or analyze the competition.

With tools like Google Analytics, Kissmetrics, and IBM Digital Analytics, you can glean crucial information about the current business activity and make the right changes in your business.

8. Lacking the Passion

Running a business takes out much of your energy and time. The bitter truth is that it deprives you of the many little things a normal man would easily get: good sleep, family interaction, social life, and “ME” time. But that’s how the biggest names of the business achieved what they have today.

People like Bill Gates, Jeff Bezos and Mark Zuckerberg have slogged their day and night in building a business. They were able to do it because they wanted to make a business out of their passion. I repeat, passion. Yeah, that’s the word. Unless you have that buzz for something, you will struggle to build a business.

You can only succeed in a business when you are willing to sacrifice the most beloved things in your life. If you can’t do that, you should not waste your time and do something that you feel passionately enough to compromise on your comforts.

Running a small business can be a tough call for anyone. While the above issues are some of the common reasons why small businesses fail, there can be more reasons a business can falter.

Anna Marsh,
An Academic Consultant and Educator

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