Why Do Small Businesses Fail?
Here’s a blunt truth about entrepreneurship in America: It’s a virtual coin flip.
The exact number varies from study to study, but data dives into business survival tend to find that roughly half of all small businesses fail within the first five years.
You might be shocked by the number, but if we had to guess, you’re probably not surprised to hear that small businesses seem to walk on a knife-edge. After all, small firms have few employees, little resources, and arguably the biggest hills to climb.
So, how do you keep your small business from landing on the wrong side of the coin?
The following are some of the most common reasons small businesses fail. While success isn’t always in your control — disasters and other unknown factors can claim even promising upstarts — there are a few things you can do to improve your chances of survival.
1. Lack of Capital + Poor Cash Flow Management
These are technically two different issues, but they’re quite intertwined. And combined, they’re arguably the top cause of failure for small businesses.
Small business owners often underestimate the amount of capital needed to start up their company. They also sometimes misjudge how much cash they’ll need to sustain operations, and they can run into issues such as unexpected expenses or slow-paying clients that can severely impact cash flow.
How to Avoid It: Small businesses should develop a detailed budget and cash flow forecast before launching. Securing sufficient capital before starting, regularly reviewing finances, and maintaining an emergency fund are crucial steps. Getting on top of your invoicing can also promote timely payments from clients.
2. A Weak Business Plan
A weak or nonexistent business plan can lead to poor decision-making, lack of direction and an inability to secure financing. Without a clear strategy, businesses can face a host of growth, marketing and operational challenges.
How to Avoid It: Develop a strong business plan that outlines your business model, target market, competitive analysis, marketing strategy, financial projections and operational plan. Regularly update the business plan to adapt to market changes and business growth.
3. Inadequate Market Research
Many small businesses fail because they don’t fully understand their target market, leading to products or services that don’t meet customer needs. Poor market research can also result in pricing errors, insufficient demand, even a lack of awareness about competitors.
How to Avoid It: Before starting a business, conduct thorough market research should to understand customer needs, preferences and behaviors. Competitor analysis and customer surveys can help in developing a product or service that fills a gap in the market. Regularly updating this research helps in staying relevant and competitive.
4. Poor Management and Leadership
Most small business owners are de facto CEOs from the get-go. However, they often lack management and/or leadership skills, which can lead to making poor decisions that turn into poor company performance. This includes fumbles such as mismanaging staff, poor communication and an inability to adapt to changing market conditions.
How to Avoid It: Invest in management training, for yourself and any other managers within your company. Seek mentorship from experienced business leaders. Regularly reviewing and improving management practices can lead to better decision-making and business success, too.
5. Overexpansion
Yes, in business, the arrow is supposed to point upward – business leaders need to be bold, have ambition and be willing to reach for the stars. But you have to stay tethered to reality. Expanding too quickly can strain a small business’s resources and lead to operational inefficiencies. Without proper planning, a business might overextend itself financially or operationally, leading to a drop in quality or customer satisfaction that can trigger a larger cycle of failure.
How to Avoid It: Plan for growth carefully. Ensure that your business has the necessary infrastructure, staffing and financial resources before expanding. Expand at a pace that is manageable and sustainable, with a focus on maintaining quality and customer service.
Don’t Let Your Small Business Become a Statistic
A considerable factor in business success is simply taking care of the fundamentals. Managing cash flow, performing market research and drawing up a solid business plan aren’t the most scintillating duties a small business owner can perform, but they’re among the most important.
That said, the responsibilities are myriad — so many, in fact, that it can be overwhelming for up-and-coming businesses that aren’t yet staffed up.
We can help take some of that weight off of your shoulders. McManamon & Co. provides a full spectrum of business services, including accounting, tax and outsourced CFO. We also offer consulting services such as strategic planning, corporate banking relationship building, and cash flow and tax planning.
If you want to learn more or get started right away, call us at 440.892.8900 or contact us online.
Tags: McManamon, McManamon & Co., small business, small business accounting, small business consulting, small business finances, small business financing, small business taxes | Posted in McManamon & Co., small business