There are plenty of reasons why businesses fail, and why fewer than 25% of businesses last longer than 15 years, according to the Bureau of Labor Statistics. They are usually situation specific, but even when that is the case, there is often a broader reason for company failure.
Sure, your clients refusing to pay, or your supplies being robbed may be what ruined your business in the end, but a business’s destruction is often a drawn-out ordeal that has one or more driving factors. The unlucky incident may have been the nail in the coffin, but it wasn’t what actually caused the business to fail.
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Even major economic events that impact your company profits might not be the complete reason for business failure. There are several common underlying factors explaining why most businesses fail within just a a few short years. Business is brutal, and not all of them survive. Even fewer businesses can actually thrive in 2023 in the new economy.
Here are the 7 real reasons why most businesses fail, counting down to the most common reason for company closure.
1. Poor And Inflexible Business Planning
This may sound similar to saying that most car crashes happen because people are bad drivers, but the problem with business planning is just how little of it actually goes on. The process of creating and maintaining a business plan is not simply an academic act. It lays out a landscape and often shows you how difficult things are and how difficult they are going to become.
Almost every business-breaking happenstance is completely predictable if a solid business plan is maintained. Also, business plans help you see your failure in gradual steps rather than being surprised by it near the end of your business. A business plan could help a person determine at the end of the day if they maintained their business, pushed it forwards, or if the business took another step towards failure.
2. Failing To Follow The Money
Businesses are going to thrive in some areas and falter in others. The problem is that where the business flourishes may not be where the original owner wanted. Such as when a jewelry manufacturer wants to make and sell dragon pendants, but the fairy pendants are selling really well. Or, when the YouTuber wants to make cartoons, but it is only their gaming videos that get any traction.
The smart thing is to follow and invest time and resources into what is selling the best. However, this often runs contrary to what the original business owner wanted, and so the business owners do not follow the money. They follow their heart, they do not invest in what makes the most profits, and so are doomed to failure. Prioritize what pays the bills first.
3. Poor Money Management
Many online articles on this subject make some mention of a lack of funding or poor financing, but the problem is far more internal. Money is only a problem for those who manage it incorrectly. If you operate without a profit for long enough, then you go bust.
Streamlining, refocusing, and generally tightening your belt should be a priority until profitability returns. And, scaling up before you are ready should be avoided. Yet, in many cases, you simply cannot remain profitable, but you should still scale back and refocus until you become profitable again.
4. A Lack Of Proper Knowledge
Perhaps one of the biggest indicators of this exists in the farming industry. Farming takes years of skills, knowledge and preparation that is passed down through generations, and that takes decades to mature.
Years of experience is required to maintain a profitable business, and that sort of knowledge is often lacking in new and even in established businesses. Taking a few small business courses is a good first step, as is starting small and working your way up to having a full-time business. You can't expect to watch a few YouTube videos or read some blog posts and be ready to launch a six or seven figure business.
5. Minimum Wage Laws
The truth is that minimum wage laws are business killers. Most small to medium businesses cannot pay the massive wages that the law demands, and so have to stay very small. Larger businesses can more easily afford to pay minimum wages, which means they can thrive without needing to push up their prices significantly. Sadly, this also means that younger people and disadvantaged people cannot get a job because small business owners are not willing to pay high prices for inexperienced workers.
And minimum wages will rise very sharply very soon in the United States and in many other nations around the world. Minimum wage laws and a rising minimum wage aren't bad things, they just have the potential to damage a lot of businesses in the process of helping some employees earn an increased wage.
6. They Have To Fail
The top reason why most businesses fail is because they have to in a capitalistic world. The market can only support so many profitable businesses. Consider it business Darwinism where only the strongest companies survive. There are only so many customers and so many suppliers. It seems unfair that very large businesses are able to dominate by taking most customers and leaving just scraps for smaller businesses, but larger businesses have flaws that smaller businesses can exploit, so it all evens out, even if it evens out a little unfairly.
Yet, in the end, there can only be so many businesses in each industry, which means most businesses have to fail each year to maintain the equilibrium.
7. Businesses Also Don't Have Control Over All Of Their Information
When you are running a small or medium-sized business, it is crucial to have control over all of your information. This helps keep things organized and lets all of your employees use that information to properly complete their tasks. Exceptional information management helps everything run smoothly while boosting your team's productivity and efficiency, helping you share information effortlessly. A great choice for taking your business to the next level would be choosing the right business information management tool that would meet all of your needs.
While it is crucial for businesses to know their numbers information, we are also referring to companies not owning or protecting their data. With a recent rash of ransomware attacks, a data leak or hack could be the death knell for any company, especially without proper preparation and insurance coverage.
Businesses Fail Often, But Yours Doesn't Have To
In the world of business, not every company can succeed. Only the strongest and smartest businesses survive, the remaining companies will merely flail or fail. That is the way it is in pretty much any economy for a variety of different reasons, so you better make sure your business is the best. Be the best or be shut down like the rest!
