10 Most Common Reasons why Small Businesses Fail

In this article, we will explore some of the most common reasons why small businesses fail.

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There are currently over 2.3 million small businesses. Unfortunately, an estimated 20% of new small businesses will fail in their first year, and up to 60% of start-up businesses will not survive beyond 5 years.

To help give your new business the best chance of survival, we’ve asked business experts for their insights on the top reasons why so many small businesses fail and how to avoid becoming one of them.

Why do small businesses fail is a million-dollar question people ask? Starting up a business is not easy, and there are countless statistics about the survival rate of start-up companies. Here are a few popular, most common reasons why small businesses fail.

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common reasons why small businesses fail

10 Most Common Reasons Why Small Businesses Fail

Business failure isn’t something anyone prays for or wants to think about when starting a business. But if you want and desire your small business to succeed, you need to know and avoid these 10 most common reasons why small businesses fail.

  • Lack of research 

One of the most important steps you need to take when you are setting up a business is to carry out research into everything from the existing market and current and future trends in your industry to who your competitors are, who your target audience is, and also what will motivate and encouraged them to do business with you.

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  • Not having a business plan. 

“According to Martin Hoffman, BOQ Business Head of Corporate, Victoria and Western Australia, A good business plan can help you get clear on the direction of your business, identify strategies and an action plan for you to achieve your business goals, and help you secure the financial backing you need to start or grow.”

Writing a business plan is an essential and vital step towards setting up a new business and also achieving your business goals.

On the flip side, without a good plan, your business is vulnerable to one of the most common reasons for small businesses to fail – mismanagement. A business plan will also assist and help you in staying focused and on track.

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  • Not having the business funding required. 

Running out of funds/money or not understanding what costs are involved in setting up and also keeping a business running is a common trap for most small business owners. And the reality is that not all small business owner has the capital or cash to cover the costs associated with starting up a new business.

So, understanding the variable and fixed costs associated and related to starting up your business should be taken into consideration when you write your new business plan.

Talking to a business banking expert will assist you in understanding what financial help you may need – whether you need to apply for a business loan, equipment finance, or find out about government support for owners of small businesses.

‘money is king.’ Even profitable and big businesses fail due to a lack of cash flow, so it is vital to negotiate across all aspects of your business.

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  • Not Asking for support. 

Starting up a new small business can be both terrifying and exhilarating. So, it’s no wonder most small business owners feel alone, overwhelmed, or on the verge of losing focus and also giving up.

But there are several places to turn and run to for help and assistance, including your accountant or business banking expert, getting access to government support for small businesses, getting a business mentor or local business-to-business support group to ask for assistance and help.

Signing up for an online business course and tapping into the best business podcasts around is also a good way to learn tips from other start-up business owners.

  • Poor Marketing 

Unfortunately, most start-ups business think it is a case of ‘build it, and they will come when it comes to promoting their new business. A thriving and successful small business needs a regular stream of sales and customers – and you require a marketing plan to do that.

Depending on the nature of your business and your target audience, a good marketing strategy will have the right balance when it comes to attracting new customers and building a base of loyal existing customers (retention).

There are several ways one can market their small business on a budget, but you must monitor and measure the results to avoid wasting valuable funds.

Traditional offline marketing activities (like advertising, direct mail, letterbox drops, local area marketing, posters and flyers, business-to-business marketing) and digital marketing (such as having a website for your business and using social media for business pages to target your audience).

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  • Not keeping abreast of customer needs and the competition. 

Building a loyal customer base requires you to know who your target customers are and how you can successfully connect with them. But it’s also important that you have the measures in place to stay on top of what your customer’s needs are.

If you fail to understand the needs of customers (through customer feedback surveys, monitoring and responding to comments on your social media business pages, and simply talking to your customers), you risk losing them to your competitors.

Speaking of competitors, you really need to keep track of what your competitors are up to because if they do a better job of fulfilling your customers’ needs, you will lose business to them.

  • Failing to adapt  

It is inevitable that your start-up business will not face challenges along the way. You may have to pivot away from the wrong service and product, a bad hire, or an unfortunate business decision in order to survive.

The essential thing in this context is to stay attuned to what is happening around you, both inside and outside your business, and be ready to respond quickly.

  • Financial mismanagement  

Aside from not having the business funding required to start up a business, not understanding how to manage your cash flow or stay on top of all your financial responsibilities as a small business owner can be a gateway to disaster.

For small business owners, Cash management must be a top priority because if your cash flow doesn’t balance out, you will find yourself in deep water fast. That’s a business risk you should avoid at all costs.

  • Failing to employ and retain the right people 

One of the biggest challenging and most common reasons why small businesses fail is hiring, managing, and retaining staff.

Establishing a diverse/various team with complementary skill sets, the right attitude, and values aligned with your small business from the start will help you in the long run. It’s really essential that you not only attract the right people but create a work culture that makes them want to stay.

  • Growing too quickly 

Not being prepared for your own business success can also be a reason to fail. Part of understanding the business risks and challenges associated with your small business is knowing what you will need, for example, in terms of technology, staffing, business funding, and supply chain management – to be prepared for your future growth plans.

Operating a successful business or being a successful business owner is not what you can leave up to luck or chance. It takes a well-defined business plan, strategic operations, and sound financial management from a start-up and throughout the life of your business.

Conclusion

Have you ever had to overcome business failure? What were your tips and tricks? Join us in the comment section for the discussion on the most common reasons why small businesses fail.

About Author

common reasons why small businesses fail
Precious Ejimofor
My name is Precious Ejiofor, I am a professional self motivated, dependable writer and editor, with over 4 year of experience in writing for variety of business and platforms. I am able and capable to write on any kind of topic.
Specifically, I focus on producing persuasive and compelling contents that is thoughtful, prominent, and engaging.

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