What Are the Main Causes of Small Business Failure?

If you start a new business today, there’s a 50 percent chance that it will fail within five years. This sounds brutal, but it’s the reality of entrepreneurship in the United States. It’s no secret that small businesses have an alarmingly high failure rate.

As an entrepreneur, you may be wondering why so many small enterprises fail in a country that’s the world’s leading economy.

Well, there are various causes of small business failure. Learning about them can help increase your chances of starting a business that will be successful.

Continue reading to learn why small businesses fail.

Poor or No Market Research

Some businesses are destined for failure even before they open their doors to customers. That’s because their owners fail to do any market research or don’t invest enough resources into quality market research.

The primary purpose of market research is to assess the viability of your upcoming product or service. The research will tell you whether there’s a sizeable market. You’ll also know the number of competitors, and even the purchasing power of the consumers.

With this information, you’ll be in a better position to tell whether to proceed with the launch or shelve the idea.

The big question is: do you know how to do market research?

The quality of your research will have a direct impact on your decision-making. If you’re not an expert in market research, hire a professional research firm that you can bank on to conduct proper research and report accurate findings.

No Business Plan

Starting a business without a business plan is like driving at night without headlights. There’s only one inevitable outcome: a crash.

Yet, many entrepreneurs decide to start businesses without any written plan. Well, perhaps they’re drawing inspiration from the fact that Apple Inc founders didn’t write a business plan until they needed $250K in financing.

The truth is that many large corporations didn’t start out with a business plan. This, though, doesn’t mean you should take the same approach.

Times have changed. Today, marketplace competition is fiercer than ever, so you want to do everything possible to give your small company the best chance of succeeding.

Drawing a detailed business plan is one of those things you must do. Before you open the business, you’ll have a clear picture of your sales and marketing strategies. You’ll also know how much revenue the business will generate in the next couple of years.

Having a business plan also makes it easier to raise capital. In fact, if you approach your bank for a business, they’ll require you to provide your business plan.

Writing a good business requires some professional knowledge. To be on the safer side, find a small business consultant and pay them to draw a business plan for you.

Lack of Adequate Capital

Speaking of raising capital, did you know access to capital is one of the biggest small business challenges entrepreneurs face during a startup?  About 83 percent of entrepreneurs are unable to raise the capital they need to start their businesses.

Capital is the lifeblood of every business. Without it, you won’t be able to pay employees, buy new stock, and fund other operations. The company will grind to a halt.

Faced with this problem, most new entrepreneurs take the bootstrapping approach. This means starting out with little capital raised by oneself (from savings, personal loans, and contributions by friends and family). Sometimes you have to do what needs to be done, but bootstrapping can set up your business for failure, especially if you didn’t start with adequate capital at hand.

It can take several months or even years for a business to start generating sustainable revenues, let alone make a profit. If you bootstrap and run out of money before the business is pulling in enough revenues, you’ll be in a cash crunch.

In many instances, the only practical solution would be to raise funds urgently. This is where some small business owners fall victim to loan sharks offering pricey credit.

Carrying expensive loans during the startup phase can be a costly mistake. You’ll spend a significant chunk of your revenues servicing the debt.

The gist of this is don’t start a business when you don’t have adequate capital at hand. This is one of the major reasons it’s important to draw a business plan first, as it will give you an estimate of your capital requirements.

Mismanagement of Business Finances

Accessing startup and working capital is already hard enough, but so many business owners still go ahead and squander their hard-earned capital. No, seriously. A whopping 82 percent of small businesses that collapse do so because of financial mismanagement.

Improper management of business funds can take many forms. Spending on unnecessary expenses, hiring too many employees too soon thus increasing the wage bill, and poor inventory management practices are some of the most common.

Early-stage businesses cannot afford to make financial mistakes. As a business owner, it’s your responsibility to develop a sound business budget that works for your finances and stick to it. Avoid splurging on big-ticket items like high-end commercial spaces when the business is on shaky financial ground.

Another financial mistake some small business owners make is failing to separate business finances from personal finances. Not only does this make it difficult for you to calculate business costs and revenues, but it also puts you at a greater risk of using business funds for personal expenses.

Hiring a bookkeeper early on is the key to proper management of business finances. This professional will keep track of all your expenses and give valuable insights that will help you make smart financial decisions.

Rapid Expansion

It’s the dream of every entrepreneur to grow their small company into a large corporation. This is possible since even today’s Inc500 companies started off as small enterprises.

For growth to occur, a business must expand. This often means opening new stores, expanding product and service offerings, and venturing into foreign markets.

Unfortunately, expansion can be a killer sword when it’s rushed. A rapid expansion can deplete your resources and throw your business into a cash crunch. Even if you’re well-resourced, a failed expansion can hurt your brand and lower customer confidence.

While you cannot avoid a business expansion (unless you want to remain a small business forever), it’s important to take your time and build an elaborate expansion strategy. Do market research to find the best new markets to enter.

Cybersecurity Breaches

As a small business owner, you may not see the need to invest in cybersecurity. After all, why would hackers target a business without lots of data or money?

You’re dead wrong. Close to 50 percent of all online attacks target small businesses like yours. That’s because hackers know small companies don’t have strong cybersecurity protection and are thus easy targets. Hackers can deface your business website, steal your confidential data, and even hold you to ransom.

The cost of a single data breach is $2.2 million. This is why over 60 percent of small companies that experience a cyberattack go out of business within six months.

In today’s digital world, you have no choice but to invest in cybersecurity protection. Besides installing firewalls and using other cyber defense technologies, train your employees to enhance their online security awareness. Often, employees are the weakest link in cybersecurity.

Ineffective Marketing

Almost all small businesses invest in marketing – and for a good reason. Marketing helps businesses communicate to their target customers, which drives sales.

Marketing is one of the first tasks you’ll undertake as soon as your business opens. But are you doing it correctly? Considering that many small businesses fail because of ineffective marketing, there’s a good chance you’re doing it wrong.

A common marketing mistake small business owners make is failing to understand their target market. Without this critical information, it’s difficult to identify suitable marketing channels. 

For example, if your business primarily sells to boomers, you can blindly run a digital marketing campaign on TikTok simply because it’s the hottest social media platform. Yet, boomers don’t spend their time on TikTok. Had you researched your target market’s digital media consumption preference, you would have known that Facebook and email are the best channels to use.

But even with a detailed customer profile, it’s still possible to run an effective marketing campaign. Most entrepreneurs lack the expertise to design and implement marketing strategies that work. They end up burning their marketing dollars in trial-and-error marketing that doesn’t yield any positive return on investment.

Marketing is a big investment for any business. If you’re not good at it, it’s best to outsource it to a marketing agency. And even if you’re a marketing expert, you won’t have enough time to dedicate to marketing activities.

Poor Product Quality

Selling inferior products doesn’t necessarily kill a business, but selling defective products will. Customers want to get the most bang for their buck, and a poor-quality product doesn’t offer that. You’ve probably heard of businesses that collapsed because customers simply stopped purchasing their bad products.

Business owners have a duty to honor the promise to sell high-quality products. Taking shortcuts in product design and development in a bid to save costs will only result in poor-quality products.

If you’re manufacturing offshore, be sure to choose a reliable manufacturer with a reputation for delivering high-quality products. Invest in your own quality control to ensure products coming from abroad meet your production standards. Some businesses have paid the ultimate price for selling defective products manufactured overseas.

Poor Business Management

Many small businesses have failed due to mismanagement. In many cases, the owners lacked adequate management expertise to oversee the various administrative operations.

A typical business has many moving parts that need to move seamlessly. There are sales and marketing, human resource management, financial management, and more.

Many entrepreneurs are only well-equipped to handle one or two of these functions, but that doesn’t stop them from trying to do everything.

It’s understandable that a small business owner can wear many hats because of budget constraints. However, if they don’t delegate some tasks and hire an experienced manager in good time, things can go south.

You’ve seen or heard of startup founders who become CEOs, only to be ousted by the board soon after. Most of the time, it’s because the CEO was found to be an ineffective manager. However, many small businesses don’t have boards, so the proprietors may not know when to quit and leave managerial roles to a more qualified person.

Know your strengths and weaknesses. If management isn’t one of them, bring in a professional to help you.

Small Business Failure Is Avoidable

The small business world isn’t a garden of roses. Small business failure is the order of the day. There are many reasons behind this high failure rate, from lack of sufficient funding to inept management.

Owning a business is a big responsibility. You’ve invested your time and money, and you want to succeed. Learning about these causes of failure can help you steer your business in the right direction. 

Our blog has more valuable tips and insights on a wide range of tops, so hang around and keep reading!