Why Small Businesses Fail, and How You Can Succeed

Do you plan to start a new business or trying to get one off the ground? Unfortunately, 20% of all new businesses will fail within the first two years, and 45% within the first five years, according to Bureau of Labor Statistics (BLS) data!

According to the BLS, entrepreneurs started 843,320 new businesses in the year ending March 2021. From the historical data, we can expect approximately 168,664 of these businesses to fail within the first two years.

Yep, that’s a tough one to swallow, especially if you’ve been working so hard on your dream of starting your own business.

But failure doesn’t have to be your reality, so don’t give up hope just yet.

While some factors will be beyond your control, such as economic downturns or natural disaster, there are several strategies you can take to ensure your new small business not only survives but thrives!

In this article, I’m going to delve into the 8 biggest reasons small businesses fail and how you can prevent that from happening to you.

#1. Poor Money Management

Poor money management can kill your cash flow and make it challenging to meet your financial obligations, such as making your payrolls or paying your bills. Late payments can then result in late fees, penalties, and damaged relationships with suppliers and vendors.

If you have trouble keeping a close eye on your business finances, you can easily pay too much on rent, utilities, and office supplies. Without a proper budget, you may even end up spending more than you can afford, which can lead to financial difficulties down the line.

Indeed, one of the most common causes for small businesses to close is running out of money. Most start-ups are initially funded with personal savings. There’s only so much personal savings can go, hence, small businesses often face cash flow issues after exhausting their savings.

Solution: Start by creating a budget for your business and sticking to it. Keep accurate financial records to track income, expenses, and profits. Develop a cash flow forecast that predicts the business’ inflows and outflows for the coming months. This will help you make informed financial decisions and identify areas for improvement.

#2. Failing to Pivot

When you cling to your original business idea, staying flexible and adjusting course when necessary becomes impossible, even if you're making a loss. To be successful, all businesses need to be able to adapt to market conditions.

For example, Starbucks originally sold coffee makers, Instagram started as Burbn (a check-in app), and Netflix launched by mailing DVDs before the streaming market made those almost obsolete.

Every brand pivots for one reason: to adapt and survive the changing market conditions.

Solution: Be prepared to let go of your original business idea if your business is struggling, or the market is changing. Don’t be afraid to pivot to a new product or service your customers want or even a new business model!

Remember what happened to many offline businesses during the Covid-19 pandemic? Many had to move online or add take-out and delivery options. You need to be agile and ready to do something like that.

Quick advice: Keep an eye on emerging technologies, such as the ChatGPT and other AI natural language processing tools and how they may or may not affect your niche.

#3. Poor Business Planning

When you overlook the importance of effective business planning, it’s tough to achieve your goals.

Without a clear understanding of your business goals and objectives, it's challenging to make informed decisions and develop effective strategies for growth.

Solution: Build a realistic plan based on present and future sales projections

Your plan doesn’t have to be complicated, but make sure it includes the following:

Business vision, mission, and goals

Market research and competitive analysis

Employment needs

Potential problems and solutions

Capital needs for all business operations.

#4. Inventory Mismanagement

Inventory mismanagement is a rookie mistake any small business can easily make. You must learn to find the right balance between supply and desire.

Inefficient inventory management often leads to a significant shortfall in cash flow. You will either end up with too many products or not enough, leaving you unable to meet customer demands. Holding excess inventory can also result in increased storage costs.

Solution: Conduct monthly audits and find the balance between supply and demand to avoid excess inventory, obsolete products, or stockouts. An inventory management software like Freshbooks can help you automate and optimize the whole process.

Pro tip: Implement a Just-in-time (JIT) inventory system to order products as needed rather than keeping large quantities on hand.

#5. Dumb Marketing Strategy

Over 2.7 billion people worldwide shop online, and the number keeps increasing. The digital age has forced many businesses to switch from an offline to an online business model. It is therefore really dumb for you not to have a robust online marketing presence in this day and age.

Online marketing is more cost-effective than traditional methods. You can use social media, email marketing, and online advertising to reach your target audience without dramatically increasing your budget.

Solution: Create a simple website that educates your target audience about your product and creates an online ordering funnel. If you don’t have the time and resources to create a website, simply sign up for a marketplace like Amazon or Etsy and start selling. Or pay your high school teenager to help you with Tik Tok marketing!

#6. Trying to Do It All

Initially, you might find hiring people and trusting them with your day-to-day business operations hard. But to grow, you must learn to delegate.

Don't try to be a jack of all trades. You can't be an expert at everything, and you have a finite number of hours each day.

Solution: Delegation is the best technique to expand and protect your business from failure. But remember, hiring isn't the only solution. You can even invest in software that helps automate processes and save time.

#7. Unresponsive to Customer Expectations

If you want to kill your new small business, ignore customer complaints and expectations!

When your business can't meet customer expectations, it can lead to losing their loyalty and trust. People will switch to a competitor if they think you can't meet their needs.

Dissatisfied customers might also leave a negative review or worse. They may share their negative experience with their friends and family, leading to poor word-of-mouth marketing and a black mark on your reputation.

Solution: Understand customers' needs by talking to them and molding your business model accordingly. Providing excellent customer service is vital to meeting their expectations.

Improving customer service can include prompt responses to inquiries, addressing complaints in a timely and professional manner, and going above and beyond to exceed expectations.

#8. Hiring the Wrong Employees

Most small businesses fail to hire the right talent due to limited resources, a small network, or a lack of hiring skills. This can lead to:

Decreased work productivity

Low employee morale

Lower employee retention

Solution: If you're not a hiring expert, bring an HR manager on board. Focus on finding candidates who are eager to learn and are a right fit for the job and company culture. Do not hire out of sentiment. Your business is not charity. Be slow to hire, be quick to fire.

Pro tip: Once you’ve hired, be sure to focus on employee retention through employee satisfaction, loyalty, and uplifting work experience.

There’s no reason you can’t grow a successful business and avoid the hurdles that have knocked down others. Sure, success isn’t guaranteed. But when you persevere and follow the solutions and tips in this article, you’ll be able to tackle any challenge that comes your way. The result? A sustainable business that you can build and scale for years to come.