Why do small businesses fail?

Starting a business is a tough job, and the data definitely reflects it. According to research done by Fundera, approximately 20% of small businesses will fail within their first year, while 70% will fail within their first ten years.

While these statistics may seem overwhelming at first, they don’t necessarily provide the full picture about what goes on behind the scenes. It’s important to understand the common reasons why many small businesses fail so that you can take steps as a business owner to avoid making the same mistakes:

Little or no business planning

Having a solid business plan is essential to setting your business on the path to success. A business plan helps you plan your marketing strategy and audience, set your budget, determine your goals and opportunities, and identify what challenges or obstacles you need to overcome in order to achieve those goals. Without a robust business plan, you will be left to wing it once you hit the first bump in the road on your business journey, and it will only snowball from there.

Poorly managed finances

Whether it’s starting your business with too much debt, mismanaging cash flow, or not bringing in enough revenue, poorly handled finances are ultimately what cause many businesses to close their doors.

One of the points your business plan should initially cover is what your budget should look like. Taking into consideration that the average business may take up to three years to turn a profit, your budget should be backed by research and be as realistic as possible. Even if you’re able to raise capital through sources like venture capitalists, angel investors, crowdfunding, grants, or even on your own, you’re likely going to have to take out some kind of business loan(s) to get the ball rolling. This is fine – as long as you understand the terms and conditions of your loans and make it a priority to pay them off as soon as possible.

Oftentimes to compete in a highly saturated industry, some businesses will offer their products or services at a much lower price than their competition. While this method can sometimes be a good way to get your foot in the door, it can often backfire once additional costs like marketing or production soon outweigh what revenue is being generated from sales. If all that is keeping your business in the market is your low prices, you’ll need to do some reevaluating.

From the beginning, you’ll need to determine how much it will cost to run operations and consistently adjust as needed. As your business grows, it’s important to ensure that you’re not just generating revenue – but that you’re returning a profit. Your business could look successful on the surface based on the amount of revenue you’re bringing in, but you won’t be able to stay in business if the overall costs to keep your doors open leave you with nothing to take home.

Lack of leadership

When building your team from the ground up, choosing the best fit for those in leadership roles is one of the most significant decisions you can make. Not only will your leadership be the face of the company to your clients and vendors, but they will be shaping and growing the entire team, as well.

When hiring for management positions, make sure that you are looking for candidates who are well-rounded; meaning they are passionate about your company’s mission, knowledgeable about the market and industry, and have strong managerial skills. Encourage strong communication throughout your team, as well as a healthy work-life balance and collaborative environment. Poor leadership can result in the constant need to find and onboard new talent, which can be costly in the long run.

You’ll also want to make sure that there are clear career growth opportunities for your employees. By providing room for your employees to grow, your business has room to grow, too.

Failure to understand customers

You’ve probably heard the old saying, “The customer is always right.” Listening to the feedback from the people who are actively using your product or service is a great opportunity to find room for improvement and act on it, especially when 82% of consumers will read reviews of a business before making a purchase. You can ask customers for their feedback directly, or you can check Google, Yelp, or Facebook reviews to see what people are saying.

Inability to adapt

The COVID-19 global pandemic has brought on a new idea of normal for the world, especially in business. However, this isn’t the only instance of businesses facing challenging times and having to adapt - and it won’t be the last. Businesses that are able to anticipate possible outcomes, pivot their business, and adjust their model for the times and situation will ultimately have the upper hand over those unwilling to change. No one wants to think about the worst outcomes, but being able to adapt can potentially be the key your business needs to get through the tough times.

Final takeaways

Starting a business can come with big risks, but it can also be a very rewarding endeavor to see your dream come to fruition. By preparing, listening, and being realistic, you can help your business grow. The Nationwide Business Solutions Center offers tips and resources for how to run your small business with success in mind.