Top 5 Reasons Small Businesses Fail.
The Top 5 Reasons Small Businesses Fail with host Henry Lopez. This list is based on Henry’s experiences as a business owner and business coach and available research and studies.
Top 5 Reasons Small Businesses Fail – Is your Business Model Broken?
- Businesses can fail for any number of reasons, and often for a combination of reasons. Sometimes it may be out of our control, like with COVID, but mostly it’s due to “operator error”. It’s because we either have a flawed business model or because we executed poorly.
- Business Idea vs Business Model – can the business operate profitably (and enough profit) and can it scale?
- Failure Rates: Based on various sources and studies.
- Approximately 20% of small businesses fail within their first year of operation.
- By the end of the second year, around 30% of small businesses have failed.
- The failure rate increases to 50% by the end of the fifth year.
- The failure rates are even higher for restaurants!
- About 70% of small businesses fail by the end of the tenth year
Here are the top five reasons small businesses fail, in no particular order except number 1, and tips on how to avoid them:
5. Lack of Market Demand: How do you know that people want or need, and are they willing to pay for your product or service?
Understanding and meeting market demand is vital. Businesses that fail to conduct thorough market research, during the planning stage, might offer products or services that do not meet customer needs or are priced incorrectly. This can lead to insufficient sales and ultimately, business failure.
Tips:
- Conduct thorough market research to understand customer needs, preferences, and trends.
- Engage with your customers through surveys, feedback forms, and social media.
- Continuously innovate and adapt your products or services based on customer feedback and market demands.
- Take the MVP (Minimal Viable Product) approach to business launch.
Recommended Resources:
4. Intense Competition or Market Saturation: Small businesses often face stiff competition from larger, more established companies with greater resources. Without a unique value proposition or competitive edge, small businesses may struggle to attract and retain customers.
“In business, the competition will bite you if you keep running; if you stand still, they will swallow you.”
Victor Kiam – American entrepreneur and TV spokesman for Remington Products and former owner of the New England Patriots football team.
Tips:
- Avoid saturated markets.
- Differentiate your business by focusing on your Unique Selling Points (USPs) and delivering exceptional customer service.
- If you are trying to sell at the lowest price alone you will likely fail.
- Continuously monitor your competitors and adjust your strategies as needed.
- Invest in marketing and brand building to increase visibility and attract loyal customers.
- Avoid industries or segments with with low barriers to entry (others can enter the market without much effort or investment).
3. Poor Management: Effective management is crucial for the success of a small business. This includes not only managing operations but also leading and motivating employees, making strategic decisions, and managing finances, and developing and implementing operating systems. Inexperienced or poor management can lead to operational inefficiencies and poor decision-making.
Tips:
• Invest in management training and development.
• Consider hiring experienced managers or consultants to fill knowledge gaps.
• Establish clear roles, responsibilities, and performance metrics for your team.
• Regularly review and refine your management processes.
Recommended Resources:
- Systems Episodes
- Financial Episodes
- Book: The E-Myth by Michael Gerber
2. Inadequate Business Planning: A solid business plan is essential for guiding a business towards success. Without a comprehensive plan that outlines the business model, target market, competitive analysis, and financial projections, businesses may lack direction and fail to anticipate challenges. After you launch your small business, then you need a Strategic Plan that keeps you focused and provides an on-going roadmap for your business growth.
“A goal without a plan is just a wish.”
Tips:
- Develop a detailed business plan or strategic business plan that includes measurable goals, and regularly update it to reflect changes in the market or your business.
- Use the plan as a roadmap to guide your decisions and track your progress. Seek feedback from mentors, advisors, or industry experts.
Recommended Resources:
1. Run out of Cash! A lack of Initial Capital or ongoing Cash Flow. This can be due to poor financial planning, underestimating expenses, or underfunding the start-up. Without enough capital to cover day-to-day operations, businesses may find it challenging to sustain themselves at best, and simply run out of cash (and any additional sources of cash) to keep the business open.
Tips:
- Start your business with enough working capital! Start smaller if you have to.
- Learn how to manage and forecast your cashflow:
- Create a detailed cash flow forecast and regularly update it to reflect current conditions.
- Consider options such as lines of credit, small business loans, or investor funding to ensure you have sufficient working capital.
- Implement efficient invoicing (including terms) and collections processes to speed up accounts receivable. Do you know what your Days Sales Outstanding is?
By addressing these common reasons for failure, and applying insights from experienced business leaders, and getting help from a business coach or mentor, you can significantly improve their chances of small business success.
Episode Host: Henry Lopez is a serial entrepreneur, small business coach, and the host of this episode of The How of Business podcast show – dedicated to helping you start, run and grow your small business.