Top Five Reasons Why Small Businesses Fail

Sep 23, 2014

help buying a small businessHave you ever wondered why so many small businesses go under within the first year? When asked for the reason, most of these entrepreneurs will simply say, “We ran out of cash,” but the story is much larger than that.
The real reason why most small businesses fail is more about the entrepreneur than it is about the business. Below are five of the most common reasons why these well-meaning people run their small businesses into the ground.

  1. Not enough cash.
    Well, this is pretty obvious, but it is one of the biggest pitfalls. Many entrepreneurs believe so fervently in their own business plan that they don’t plan for any bumps in the road. When things don’t go as smoothly as planned, or they run into unforeseen expenses, the business can no longer afford to operate. With proper planning and sound advice this is an easy outcome to avoid. It’s better to wait until the proper amount of money can be raised before starting any new venture.
  2. The owner lacks experience.
    A great idea is often the impetus for starting a small business, but that won’t mean much if the owner lacks the experience to carry it out. Unless you are an extremely fast learner, a lack of experience could be your downfall. What are the benefits of experience? It helps you define a vision for the company, develop operating standards based on a solid business plan, and remain focused on a defined goal. On the flip side; a lack of experience often translates into poor management skills, inadequate training of employees, and uninformed business decisions.
  3. No understanding of business finances.
    Even if you weren’t a business major in college, running a profitable business requires an understanding of business finances. Without this, it is impossible to be in control of your business’ outcomes. Financial wisdom will tell you if you’re paying too much for labor, rent and materials, making the business more likely to encounter cash flow issues. Before starting a business, develop a plan that identifies your desired financial outcomes and positions the business for success.
  4. Capitalizing too quickly on success.
    Why do some businesses seem to grow so much faster than others? Perhaps it’s because the owner was too confident and expanded too quickly into uncharted territories; or perhaps they didn’t develop it quickly enough. A well planned expansion can move a company into the stratosphere, but a hasty move can prove unprofitable and actually detract from the success of the original business. Don’t be too quick to capitalize on success – it could become a drain on your time and resources and ultimately lead to business failure.
  5. Not differentiating from competitors.
    When an industry is extremely competitive it can be tempting for businesses to imitate one another; to compete by going head-to-head and lowering prices. However, if the business model is exactly the same as a competitor this approach will reduce profits and result in an all-or-nothing battle. Rather than “splitting market share” with a tough competitor, a better strategy is to differentiate your business and offer something truly unique. Conduct independent research; develop a marketing plan that focuses on customer experience; and be ready to move quickly in an ever-changing marketplace.

Remember, there could be dozens of other reasons why your small business is failing, but identifying the problem is the first step toward turning it around. Don’t let the statistics intimidate you; instead, become knowledgeable about the challenges that lie ahead.