Anyone who opens a new business starts small. The same goes for even the largest companies, like Amazon and Airbnb, to name a few – they all started out as small businesses.
However, companies have to grow over a period of time. And growing a business requires hard, intense work and astute judgment.
Unfortunately, anything between 60 percent and 90 percent of all small businesses falter and fail within the first two to five years of opening.
Thus, the entrepreneur faces loss, mental stress, and a certain level of disgrace.
There are actually six common reasons most small businesses fail. In this article, we will explore and discuss these six common reasons small businesses fail.
Six Reasons Why Small Businesses Fail
Usually, the business owner or entrepreneur is to blame for the failure of any small business. Now this may sound a bit unforgiving or harsh for business owners.
However, if we look at the six common reasons why most small businesses fail, it would be clear that much of the blame lies with the owners.
Here are the six common reasons businesses falter and fail.
no business plan
There is an old axiom that says: Failing to plan is planning to fail. That is exactly one of the main reasons why a business fails.
Many entrepreneurs open a business with a half-baked business plan, or sometimes no business plan at all.
A business plan outlines several important features. These include the target customer, growth projections, proper utilization of capital and earnings, and staffing, among other items.
Regardless of the nature of the business, a proper business plan is an absolute must. It serves as a roadmap for business operations and future growth.
A good business plan also outlines how capital and profits would be used when deciding how many employees are required to keep operations running smoothly.
copycat business idea
The second failure of most small businesses is because they are based on a copycat idea of another successful one. Getting an idea and exactly copying the business are totally different things.
It’s worth remembering that not every entrepreneur can successfully copy someone else’s business model and still flourish. Therefore, it is always good to look for a unique idea instead of copying someone else’s business.
Because a particular business prospers due to excellent management and astute judgment on the part of the entrepreneur. An imitation business usually fails because it cannot compete on equal terms with the successful and established one.
It’s hard for a new business to win customers away from the old one, unless it has something unique and extra to offer through products or services.
And often there would be more than one successful business in the same field. Therefore, copying a business model could lead to its colossal failure.
Copycat companies often engage in price wars hoping to grab a quick slice of market share, it’s one of the most common reasons small businesses fail.
Small businesses usually try to lower their fees and sell products or services for minimal profit and sometimes even at cost price. This is the surest path to disaster.
Because selling at very low profit margins means that the small business will be deprived of sufficient operating capital.
How to find unique ideas.
Many mentors or experts provide small business ideas online that will help you come up with some unique ideas. You can easily find these experts on youtube or blogs. Not only will this help you find unique ideas, but it will also increase your trading knowledge.
failure to innovate
Noted author and management guru Peter F. Drucker says: Every business has two functions, marketing and innovation. Too often, small businesses ignore these two vital functions only to end up failing.
Aggressive marketing is, in fact, the key to the success of any business. That is the only way to create brand awareness as well as the need for the products and services that a company offers.
However, some entrepreneurs do not exert extra effort in this vital function. Or, your efforts are focused on the wrong kind of customers.
As a result, they are unable to amass a sizable and significant number of clients that can bring their business to a profit.
Also, innovation is the most important part of a business. You may have launched some products or services in the market. However, consumers always demand innovative products and services.
Unless a small business innovates its products to meet market demand and match or exceed a competitor’s offerings, it may fail by losing customers.
Poor financial management
Poor financial management is also one of the common reasons businesses fail. I’m not just talking about managing accounts or keeping track of expenses and income. In reality, financial management means much more.
The first rule is to control income and expenses and eliminate those costs that are not really beneficial to the small business.
After all, smaller businesses mean smaller budgets. Therefore, it is necessary to have an astute judgment of where the money is going and to find out how it would benefit the business.
The second rule is to create a corpus background. That means putting some money away from earnings and investing it in savings plans, stocks, exchange-traded funds and other financial instruments to make it grow.
That way, the small business won’t have to search for funds in a hurry if there is a shortage of funds for expansion plans or to deal with any emergency.
Zero or poor online presence
We are all living in the new normal after the 2020 Covid-19 pandemic. As a result, most businesses have shifted their operations to online platforms.
These include a business website, a business blog, social media pages, and email marketing, among others.
A strong internet presence can actually help you get more customers which translate into higher profits and can save your business from ruin.
Additionally, small businesses fail to harness the power of social media platforms like Facebook and almost neglect to mark a presence on YouTube.
The result is that fewer people know about the business, leading to a shortage of customers.
In addition to marking an online presence, it is also important to do proper digital marketing for the small business website and blog to ensure that it appears in Google’s search engine results pages (SERPs), which helps to draw the attention of buyers.
And finally, the problem of long payrolls. Small businesses often start out by hiring a lot of people because the employers believe they are needed for day-to-day operations.
That is a myth. Having too many employees means too many redundant hands that are of little or no use to the small business. And this invariably results in longer payrolls.
At the same time, having too few staff or workers means being overworked. And overworked employees are always unhappy because it creates stress.
In addition, companies have to pay overtime to employees who work beyond normal work hours, which in turn further affects the profits of the small business.
Business owners are also at fault here in some cases. Business owners often research their company’s earnings and cash flows to meet their personal needs.
That is a bad thing as they deprive the business of much needed money. Instead, business owners should be paying themselves a salary instead of helping themselves with large amounts of business cash at will.
There may be other minor reasons why a small business fails. One of them is trying to cater to the wrong market. The other is negative customer reviews.
However, it’s easy to turn a business around and avoid loss if an entrepreneur addresses the six common reasons most small businesses fail.