Reasons Why Small Businesses Fail : 11 Most Common Reasons

According to the U.S. Bureau of Labor Statistics, approximately 20% of small businesses fail in their first year, and only 25% of new companies make it to 15 years or more.

Of the 100 businesses that set up shop today, only 25 would survive after 15 years. That’s a whopping 75% failure rate for small businesses in the United States.

As a small business owner, you should understand the reasons why small businesses fail. Learning from other business owners’ mistakes will help you save time, energy, and resources.

This guide will help you understand the reasons- why small businesses fail.

Sounds good?

Here’s a sneak peek into what you’ll learn:

1. Starting For The Wrong Reasons

The simplest definition of Business = Problem-Solving.

But unfortunately, social media has portrayed becoming an entrepreneur as fancy and astonishing. (Read: Elon Musk). Employees were working at 9-5 jobs; dreamed of quitting their jobs and starting their own businesses. Nothing wrong with it. But starting a business just because you are bored with your job is not advisable.

Running a business involves approaching prospects, marketing, product/service fulfillment, customer success, and customer service. One has also to ensure that your team is functioning effectively.

In a nutshell, every day is all about problem-solving and making sure that solutions are executed for maximum output. By ensuring this, earning money becomes a by-product. So, if you are not passionate about solving problems on a day-to-day basis, it is likely that your business will fail.

2. The Market Does Not Exist

Okay, so you are clear about what problem you are solving. Congratulations! You have cleared the first hurdle. Here comes the next part – ensuring that there exists an identifiable group of people facing that problem

For example – During the COVID-19 pandemic, people around the globe required face masks. So, mask manufacturers sprung up in quick numbers to fulfill that need. Similarly, your solution should solve a ‘real-life need.’

Also, your solution (product/service) should be easy to deliver to groups of people needing that solution.

Alex Hormozi, in his book – “$100M Offers” suggests finding a market to cater to while keeping the following factors in mind:

1. Your customer should be easy to reach and target.
2. Your customers are willing to spend money to solve their problems.
3. The number of customers and problems they are facing are growing.
4. Customers are experiencing problems with the current solution.

It, therefore, becomes essential that, ideally, you are a part of the group of people you are solving problems for. Since this helps you better understand their pain, problems, desire, and worries and build solutions for them.

3. Inefficient Planning

“If you fail to plan, you are planning to fail” – Benjamin Franklin

A successful business doesn’t happen by accident. It requires intricate planning and impeccable execution. It requires well-thought-out action steps that must be executed on a day-to-day basis – consistently. Yes, you may require to iterate occasionally, but you need to plan well to achieve your target.

Before you begin planning, a lot of variables need to be considered.

It includes:

• Your business vision and objectives
• Your revenue model
• Market analysis and competitor analysis
• Potential problems and solutions
• Financial – capital investment, balance sheet, financial forecast, and budgeting
• Marketing and advertising, etc

You could also refer to this comprehensive article by our team to learn how to write a business plan. Additionally, you could use the free business plan examples included in the article to get started with your plan.

4. Capital Mismanagement

Rich Dad Poor Dad, best-selling author – Robert Kiyosaki; In his book; explains the importance of cash flow. Cash flow is the amount of money entering and leaving your business over a given period.

It is vital since it helps your current expenditures and plans for the future.

A small business should, therefore, always be a positive cash flow.

It helps the business function smoothly since all expenditures are taken care of. Expenses include real estate rent, salaries, and production costs.

It should be understood that businesses with positive cash flow can spend more to improve their product and market themselves better. The business should price its product/service by keeping its expenses in mind. Pricing should be kept in mind expenses, time, and resources. Learn more about our guide on pricing strategies.

The best way forward for small businesses is to track their daily Profit and Loss. As a business owner, this will inform you about your daily cash flow.

5. Taking Decisions Based On ‘gut’ Feeling

Do you know what successful businesses like Amazon, Walmart, and Ikea have in common?

Think about it.

Okay, try one more time…

The answer is- objective, data-driven decision-making.

As entrepreneurs and business owners, our solution is the best. We live too much ‘in our head.’ But the reality is different from what we ‘perceive.’ According to some studies, more than half of Americans rely on their “gut” to decide.

The companies mentioned above focus on making objective decisions based on data. They study their analytics and collect data to make accurate decisions. It also helps them decide on a future course of action while keeping in mind past mistakes.

According to an article published in Harvard Business Review – collecting and analyzing data gives a competitive advantage to your business. It helps to offer better solutions that, in return, attract more customers and eventually marginalize your competitors.

6. Inability To Market selves

Imagine you researched your target customers, built a solution to solve your customer’s pain point, crafted a thorough business plan, learned how to manage business cash flow, and have been tracking your data to the T.

But, your business is not growing. There is revenue coming in, but not in the volumes you want.

If you can relate to this situation, it probably means your business needs Marketing.

Marketing means promoting and selling products or services to solve your customer’s problems. It is one of the most common reasons why businesses fail.

Companies like – Apple, Nike, Mcdonald’s, and Mercedes are legends in their market because of their marketing.

After the COVID-19 pandemic, small businesses have realized the importance of marketing, especially digital marketing. Small businesses had pivoted to a digital-first approach to keep themselves afloat during the pandemic.

This step-by-step guide written by the Upmetrics team can help you strategically plan your marketing efforts.

7. Failure To Know Your Customer’s Feedback:

Collecting and analyzing feedback helps small businesses understand if their product/service is helping solve their customer’s problems.

Collecting feedback and iterating on your business’s offer helps build competitive differentiation. It enables you to stand out easily in a saturated market and show that you genuinely care about your customers.

Some critical feedback sources are

1. Your database. Call and talk to your customers. Get feedback and iterate. This is why it is essential to collect and analyze your data.
2. Google reviews
3. Social media reviews
4. Online review communities like – Trustpilot
5. Local business information aggregators like – Yelp and TripAdvisor.

8. Unsustainable Expansion

Small businesses often commit the blunder of rapid expansion once they show signs of growth. Instead of investing in improving their present offer, businesses often expand their product line or start developing their stores.

Theoretically, more stores and products/services should lead to more sales. But it is farther from the truth.

Not only does it lead to a drain of finances, but it also dilutes the customer’s experience. Small businesses should stick to their business plan and avoid unnecessary expenditures.

9. Fear Of Selling

“The lifeblood of any business is sales and cash flow” – Brain Tracy

Your business will not generate revenue if you cannot sell your products or services. You must learn how to persuade your customers about how your product/ service can help solve their problems.

One of the most common reasons businesses cannot sell their products/services is that they never really understand their customers. (Explained in detail in #2).

Your offering should match your customer’s requirements. If it does, it becomes easier to sell. It is, therefore, essential to collect and analyze customer feedback regularly. (Point #7)

10. Failure To Pivot

The COVID-19 pandemic forced small and medium business owners to adapt or close doors. According to a study by Yelp, approximately 70,000 mom-and-pop stores were shut down permanently in the United States between March 2020 and August 2020.

Many of these stores who took managed their finances wisely could switch their operations online.

Small business owners must manage their cash flow wisely and save for such difficult times. They should be ready to pivot to a sustainable business to manage their operations.

11. Lack Of Investment In Team-Building

Often, small owners hire the cheapest or most readily available talent to run their operations. But that is not the wisest decision. Mismatch in skills and experience can reduce your productivity and efficiency.

Choose employees based on the results and experience they can bring to your business, not because they are your friends or demand a cheaper salary.

How Can You, as a Small Business Owner, Ensure That Your Business Succeeds?

Mark Zuckerberg, founder of Meta (Facebook) once quoted – “In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”

While Mark highlighted the importance of taking risks and moving out of your comfort zone to take action, it is equally important that you pay attention to how meticulously and strategically you plan operations.

“If I had an hour to chop down a tree, I would spend the first 45 minutes sharpening my axe” – Abraham Lincoln

Tools like Upmetrics can help plan your business 2x faster. Not only does it help you build a plan and create strategies, view forecasts, and collaborate.

You can also start with a free demo to discover how Upemtrics can help you achieve this.