7 Primary Causes of Small Business Failure

primary causes small business failure why businesses close

Starting up a business isn't typically the hard part- it is staying in business that gets the best of most entrepreneurs. 

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A lot of companies begin strong with great ideas and innovations but somewhere along the line, things seem to go downhill sometimes even before they celebrate their 1st year anniversary.

Statistics show that 20% fail in their first year and only about 50% will make it in their fifth. which can be discouraging to some business owners. However, there are many lessons to learn from past mistakes. 

Take a look at these 7 primary reasons why small businesses aren't successful and tips on how you can avoid business failure. 

1. Poor or No Business Planning 

There is an old saying that goes "If you fail to plan, then you plan to fail". A lot of small business owners do not take out time to run intensive and detailed research on the kind of business that they plan on starting up, as well as other details that go into running the company.

A business idea may sound wonderful on paper but might not be strong enough to stand the test of time in reality. Some business owners do not bother to ask the right questions- or ask questions at all. Failing to properly plan out foundational components of your company, as well as long-term factors, can cause you to have short-lived success.

2. Insufficient Capital

Business failure isn't something that happens overnight or is caused by a particular action, businesses fail because some of the most essentials things weren't appropriate. When it comes to financing a business - which is one of the most important aspects of starting a business, there are a few considerations to take before jumping off the deep end.

Firstly, before you kick start your company, it's best that you have a clear and concise budget of the total costs and expenses of running your business for at least a year. Keep up with your working capital and make necessary cuts for overhead expenses when possible. 

You may not be in profit in the beginning but having a steady flow of cash is ideal. Also, beware of pumping too much capital into your company from investors and loans. Use professional business accounting software to help you record all your financial transactions, expenditures and income. 

3. Poor Management  

Managing a business is no light task, especially if you have little to no experience in it. It may sound as easy as sending someone to run errands or getting customers to buy your products but there are plenty of moving parts that pile up on a daily basis.

Making decisions, supervising staff and leading the vision of a business requires a lot of preparation, patience, and practice. Take note of how other successful leaders have been able to take their business to new heights by being able to manage all of the right pieces well. Neglecting to implement the right management style, systems and operations can affect the productivity of your entire firm and possibly lead to business failure.  

3. Ineffective Marketing / Advertising 

We live in a digitally-driven society where most people prefer to make purchases from the convenience of their homes and have it delivered to their doorstep. This is also a time where the way you advertise your business on the internet could drastically affect sales and new customers. But where you do most of your marketing depends on your business.

It starts with knowing your target audience and being able to speak to them effectively. For instance, someone who works from home and barely leaves the house might notice billboards and flyers. Figure out who your people are and where they tend to look for products and services like yours the most so you can show up in front of them.

4. Expanding Too Quickly

Imagine your business flourishing and doing well within the first year. Naturally, you'll be excited about growth and may even think about going bigger. But expanding too quickly could make things a little more complicated than you think.

Decisions about expansion and branching out should only be brought up after the company is in a very financial state and if there is a justifiable reason for scaling. For instance, adding a new product line due to high demand and pre-orders from existing customers.

It's fine to be excited but try not to get ahead of yourself because this will bring on new issues that you may not be equipped to handle if you haven't mastered the issues on the level that you're currently at. Keep in mind that slow and steady does win the race often. 

5. Wrong Business Model

Business is not one size fits all. Just because you see a company using a certain business model doesn't mean that this will work for your audience. For instance, opening a brick-and-mortar as an extension to your eCommerce shop might not be the best route for you to take even if you've seen it done successfully before.

This part is truly about testing what structure will yield you the best results and that doesn't look the same for everyone. Find a model that fits your business best and avoid following trends because of money stories that you've heard.

6. Lack of Uniqueness

You might hear people say that saturated markets can lead to business failure. The actual truth is that many businesses aren't presenting themselves uniquely enough to stand out and captivate people with their presence. This has a lot to do with brand positioning.

Take a good look at your business and compare it with your competitors. Find out what truly sets you apart from the crowd and highlight this special factor. 

7. Lack of Sales

This factor speeds up business failure faster than any other. A new business that doesn't meet its sales goals is one step closer to closing down. The bottom line is you need customers to have a profitable business.

When starting up a company consider a realistic demand for what you're offering. 

Avoid Business Failure With Your Company

Going into business is difficult and takes a lot of bravery. Many great people with amazing products and services experience business failure because they were blindsided by some of the issues listed above.

A future of closure, company failure, or bankruptcy doesn't have to be in the future for you or your company. Take heed to some of the advice listed for a more successful chance of watching your vision soar. For more advice on operating a business, check out the Startups and Consulting Section of our Bootstrap Business Blog. 

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