The Top 12 Reasons Why Small Businesses Fail
Small businesses can be a great source of income. However, the road to a successful one is not easy. Starting a business is challenging, but the bigger challenge is managing daily operations to keep your company up and running. Statistically, only around 20% of new businesses make it past their first year, which can undoubtedly be daunting if you plan to start your own.
That said, do not let the numbers discourage you, and use this as an opportunity to learn more about the top reasons why small businesses fail. This way, you can better prepare for your business and watch out for pitfalls to avoid such mistakes.
Here are the top 12 reasons most small businesses fail in the beginning or while they’re trying to grow and tips to help you avoid the same mistakes.
Regardless of your company’s goals, profit will always be one of the critical success metrics. When running a small business, profitability will help you secure financing and attract investors to continue growing. And, of course, earning a profit is also crucial to remain in business.
Inadequate Cash Reserves
Another common reason for failed businesses is allotting insufficient cash reserves. New owners often do not know the costs involved in setting up and running a business, forcing them into bankruptcy early. So to avoid this, make sure to research startup costs to get a good idea of how much cash you should set aside.
Failure to Manage Cash Flow
Aside from lack of capital, another common money problem that small businesses face is the failure to manage cash flow. When starting out, you should understand how payment terms work with suppliers and customers. For example, if you sell products on credit, you may have to wait months to get the cash.
Failure to Understand Market and Customers
In today’s day and age, the market is constantly changing, and customers have incredibly high expectations. As such, you should study your market and customers thoroughly before dipping your toes in the water. Read up on the market trends and identify your target market to understand your customers’ needs and pain points.
Wrong Pricing Strategy
Employing the wrong pricing strategy can affect the success of your business. While low pricing may encourage larger sales volumes, it can also hurt your profits. Conversely, overpricing your product or service can turn customers away. Ultimately, the best way to set the correct prices will be to calculate your costs and analyze market demand and the competition. From here, you can determine an appropriate markup.
Failure to Anticipate and React to Industry Changes
The past few years have proven how dynamic the market is. Change is constantly occurring, so you need to anticipate and respond quickly to changes in your industry. The pandemic is just an example of how important it is to be ready for anything. The more agile and capable you adapt to the industry, the more likely you are to succeed.
Overgeneralization means spreading yourself too thin. This is extremely common among entrepreneurs since they often have fresh ideas and want to do everything to please everyone. Unfortunately, doing this can sacrifice quality and result in average results and profits. So to avoid this, you should have a clear vision for your business to know where to focus your time and effort.
Overdependence on Specific Customers
Relying too much on one big customer or type of customer can limit growth and prevent you from hitting your sales targets. It also increases the risk of business failure since everything rests on a handful of customers. In addition, if they are not satisfied with your product or service, you may have to close down earlier than you want to. It will be best to have a more diversified customer base.
Business owners naturally want to grow their company over time, but you also have to be realistic with your growth plans. Expanding and scaling too quickly can do more harm than good since you eat up your cash reserves. You may also lose track of your focus and compromise quality, which will reduce profitability.
Believing You Can Do Everything Yourself
As important as it is to be confident in your abilities, it is essential to recognize when you cannot do everything yourself. There is nothing wrong with entrusting specific tasks to your team members instead of micromanaging everything. Instead, you should focus on the most important decisions in your business and give others corresponding responsibilities.
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When running a small business, you should never settle for less. Strong and competent management is critical to success, so you need to set high standards for employees and choose the best people to fill vacant positions. Think carefully about what skills and qualifications you need in your team to avoid having poor management in your business.
Some small business verticals are feeling this more than others in today’s market where the workforce has shifted away from many traditional blue-collar work to more non-traditional work-from-home or virtual white-collar solutions offering more pay and flexibility. You couple this with a mass population who either died during the pandemic or left the workforce altogether to either stay home with children or who retired and all of sudden, juggling to fill roles and shifts became a daunting task for many business owners.
It’s important to take time to do your research and learn about the shifting expectations of roles and the responsibilities of those roles. What are common salaries for that role today? What are they expected to do on the job? What are reasonable expectations for education or previous history? What are more common benefits being offered? And, how does this all fit your business environment, needs, goals, and budgets?
Once you figure that out then you need to understand how to reach these prospective candidates, how to get them excited at the possibility of working with you, and how to keep them. Job turnover and job insecurities have been one of the leading causes many businesses; (small or large), struggle during times of economic disruptions like a pandemic.
If all of this seems overwhelming or too daunting for you to tackle on your own, then maybe it’s time to bring in someone who can help you with that.
BONUS: Business Owner’s Attitude
Finally, your attitude as an owner and founder is critical to your business’s success. Aside from having the drive to achieve your goals, you should also be objective. Most of the time, entrepreneurs become too biased and think they have the best product or service without thinking objectively. Thus, it is important to be realistic and learn to critique your business when needed. This way, you can find valid points of improvement.
Small businesses can fail for many reasons. But overall, it boils down to poor management skills or capital and financing issues. Ultimately, to ensure your business succeeds and stays competitive, you should have a clear vision, do your research in advance, and plan your finances properly.
Is Growth in Your Brand’s Future?
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