Top 5 Reasons Why Most Small Businesses Fail

Elorus Team
Elorus Team

Being a business owner mostly means taking risks and being 100% committed 24/7 in order for your business to survive and thrive. However, how many times have you seen a perfectly good idea, become a profitable business for a while, and then crash to the ground for, “apparently”, no reasonable explanation?

According to the 2016 SBA’s (Small Business Administration) statistics, approximately a whopping 78% of small business startups fail in their first year of operation, and 50% of the remainder survive up to 5 years. Only ⅓ small businesses last for ten years or more.

These are definitely some discouraging stats, but nonetheless, small businesses comprise the 99.8% of all businesses currently operating in the U.S. This is the reason why you often hear analysts calling them the economy’s “backbone”, they truly are.

So, how can it be that small businesses fail so quickly when in fact they seem to be so popular among entrepreneurs? Are entrepreneurs out of their minds, setting off for an endeavor that is highly likely to fail within the 1st year? Of course not, and if only things were that simple in reality.

The burning question here is why they fail and how come business owners don’t know how to prevent it in the first place. And this is our week’s subject, ladies and gents!

Let’s break down the most important factors that lead small businesses to fail…

Starting out wrong

While 75% of owners are confident about their business, something happens down the line and those same businesses apparently fail. Or does it happen from the very start?

Ask a wannabe business owner why they want to start a company and if the answer is something like “ I want to be my own boss/have as much as free time as possible/make a lot of money” rest assured that this business is going to fail sooner or later.

So, the number one reason why businesses fail is the wrong mentality. In order for a business to be successful and remain that way, you need one or more of the reasons below to be true, the more the better:

  • You have a passion for what you do and want to pursue your dreams no matter the challenges.
  • You believe said passion is able to fulfill a market gap or differentiates clearly from already existing brands. Moreover, your belief is backed up by solid analysis of the competition and the marketplace you’re trying to be a part of.
  • You are determined to succeed; when most people give up, you keep going
  • You perceive failures as lessons. You don’t get defeated when something goes south but rather persist, learn from your mistakes, and move on. Trust the process, no one ever succeeds on their first attempt (or the 10th sometimes).
  • You like interacting with other people and are able to get along with different types of personalities.
  • You work well under pressure and are a competent and creative problem solver.

Cash flow problems

We have repeatedly discussed this issue and how important good cash flow is to keep your small business afloat. This also applies when starting out, you need to have sufficient funds to cover operating costs while you don’t generate as many revenues.

“82% of US small businesses experience cash flow problems”. Insurance Quote

It should be a no-brainer, your business needs cash to run properly and stay on top of obligations, sustain payroll, and give back something to you – the business owner.

The majority of new business owners get carried away from the excitement and their never-ending to-do lists that forget to keep an eye on this crucial financial indicator. Others are not familiar with the concept and don’t quite understand how it works.

To give you an idea of what needs to be done, you need to estimate the money your business will require you to invest for the first year of operation.

Then, you need to always be aware of the outstanding invoices your customers owe you and the amounts you owe to your vendors, as well. Compare them and in case you find your revenues don’t cover your expenses, you need to take further actions. Elorus enables you to be constantly up-to-date regarding your cash flow and monitor due invoices with just a few clicks!

Location matters

It matters because, especially for local businesses, it determines your clientele’s demographics and demographics are key in sales. For example, your graphic design business is more likely to thrive in a location where there are plenty of other businesses close by.

Other than that, location is important in terms of taxation, regulations, and various costs pertinent to the business’s operation. For example, you want to prefer a city or state where taxation is low on new businesses, has reasonable regulations in place and rent is affordable!

It will shock you how many businesses have failed due to their location alone. Therefore, do your homework before deciding where to establish your small business.

Poor Management

Nothing matters of course, if you have a business but don’t have a clue on running one. New business owners often lack knowledge in management and basic financial expertise; elements crucial to everyday tasks.

Oftentimes, especially at the beginning of a venture, the owner is required to fulfill multiple roles until it’s time to recruit the company with new employees. So they end up being the manager, the production, the seller, and the accounting department.

You get how impossible it is for one person to carry out all these tasks with the same competency! The business owner has to educate themselves about all those things at first and then hire employees or outsource work to experienced professionals.

Management is all about making sure all the different aspects of a business work like a clock to everyone’s benefit; yours and your clients’. It’s about leadership and nurturing a creative environment for your employees. Once your business takes off and becomes profitable this process has to be continued. You need to always study the marketplace and obtain useful information regarding customer needs and trends.

No planning

One major reason why small businesses fail is the lack of careful planning. Upon establishing a business you need to prepare a business plan. In a previous article, we outlined all the important components a solid business plan needs to contain.

Consider the business plan as the compass that shows the way and where you need to be. Namely, the business plan should include:

  • A competition analysis
  • The company’s description, goals, and vision
  • Marketing analysis
  • Budget allocation
  • Sales and expenses forecast, balance sheets, income statements

Behind every successful business, there’s a lot of hard work, dedication, and careful planning. Unless you analyze all the parameters and set realistic goals by utilizing accurate data, success will not follow!
Surely, there’s no “one size fits all” recipe for success but the key element in every venture is the owner and how committed they are to their dream. Most successful entrepreneurs should learn from their mistakes and persevere through their failures. Remember to remain open to new knowledge and ideas!