8 Reasons Why Small Businesses Fail

Nobody starts a business expecting to fail, but sobering statistics indicate that many do, in fact, go under. According to the Small Business Administration’s Office of Advocacy [PDF], three out of 10 new firms with employees fail to survive for more than two years, and about five out of 10 close up shop within five years. The survival rate is even lower for sole proprietors.

There are many external causes for small-business failure, including market size and customer demand, but other equally important factors  can hobble a business in its earliest stages — and prove fatal in the long run.

Here are eight reasons why small businesses fail:

  1. Flaws in entrepreneurial thinking. There’s no template for what makes a successful entrepreneur tick, but certain character flaws crop up again and again when a business fails. It’s vitally important to know why you want to start a business. If you think that you’ll make money quickly and easily or that, just because you work for yourself now (and not someone else), you’ll have more time to spend with your family, it’s time for a reality check. Without a passion for what you do, without the mental and physical stamina to put in long hours, and without the attitude that you can take setbacks and keep moving forward, you might as well cut your losses now.
  2. Poor planning. A business can’t succeed without a business plan. This is where you work out the crucial elements that every business must have — finances, marketing, management, and both short- and long-term strategy. What is your vision for the business? How many people will you need working for you? What will the budget look like? Can you foresee likely problems and how to address them? Getting everything down on paper before you try to get the business started greatly increases the odds for success.
  3. Lack of funding. Too many budding enterprises fail to secure enough operating funds to get off the ground or make it through the crucial first few months. It’s easy to underestimate the capital required for everything from equipment and inventory to staffing and utilities. As part of the planning process, thoroughly calculate potential startup and operating costs.
  4. The wrong location. Any bricks-and-mortar enterprise must operate out of a viable location. This means selecting a site that’s customer-friendly (convenient to get to, ample parking, clean and comfortable, etc.). If you’re looking at a spot that’s currently vacant, find out who was there before and why they relocated or went out of business.
  5. Ineffective marketing. If customers don’t know who you are or even that your business exists, what hope is there to succeed? Successful business owners know — or enlist the services of professionals who know — who their target audience is and which marketing channels will most effectively reach them. They also understand the value of advertising through online marketing, social media and other digital resources.
  6. Hiring the wrong people. Your business will never prosper if you employ the wrong people — that is, employees who lack the willingness to work hard and who exhibit poor customer-service skills. Hiring good people is yet another time-consuming element of keeping a business afloat, but in the long run it takes less time, effort, and money than hiring the first people who walk through your door.
  7. Miscalculating the competition. An entrepreneur foolish enough to underestimate or even ignore his competitors is setting himself up for failure. Regardless of your product or service, every business has competition. Look into obtaining a competitive analysis of your niche market. Stay updated on changes in competitive behavior or strategy. With a comprehensive understanding of who you’re up against, you’re better positioned to come up with a good idea before they do.
  8. Believing you can do everything yourself. You’re strongly motivated. You’re full of energy. You think you can take on all aspects of growing a business and by sheer force of will make it work. The sad truth is, you’re wrong. Seek out the advice of mentors or others with experience and know-how. Invite suggestions and ideas from family and friends. Understand that as resourceful as you are, there will always be parts of the business you shouldn’t handle yourself.

About Lee Polevoi

Lee Polevoi is an award-winning freelance copywriter and editor and a former Senior Writer for Vistage International, a global membership organization of chief executive officers. He writes frequently on issues and challenges faced by U.S. small businesses.
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7 comments
DLW WAS HERE
DLW WAS HERE

One of the biggest mistakes I made in the beginning was,I underestimated the ignorance of the consumer. I had suppliers that I could buy from in large quantities and sell at a competitive price. What a wonderful idea. Beat every bodies prices and the public will beat down your door. Instead every few weeks the sheriffs department would come in because some one was concerned that my merchandise had to be stolen to be able to compete with the big name stores. It was good that our sheriff new a little about business and no problems has ever risen because of this. The point is,the consumer doesn't care whether you survive or not. They don't care if you eat or not. For the most part,they only care about themselves. So take all the advice listed above. But also remember. It's you and your families welfare at stake here. Nobody  in business gives a rats butt if you survive or not. A good deal for the consumer,for the most part will be a bad deal for the retailer. Set your prices profitable,be fair to everybody. Do the best you can,and remember,you're own you're own.

Ayurvedic Herbal Medicine
Ayurvedic Herbal Medicine

The number one reason why marriages fail is because of money issues, and small businesses are no different. The amount of capital available to you at the time you establish your new business is a critical determinant of the success or failure of your business.

Hazame
Hazame

really grate article, thank you

Jewel Brown
Jewel Brown

I own a small after five years I have to close my doors. Everything that is listed I can relate to them because I went through it all. Will I ever open another business the way I feel about having a business and all the hard work I put into this business all alone no I would not open another business.

Knowledge
Knowledge

Umm......... it's "great" not "grate" lol.

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