Top 5 Reasons Why Small Businesses Fail
As every small business entrepreneur realizes, there is a lot of risk and uncertainty that goes into launching and then running a small business. Even if you do everything right, there’s still a chance that market conditions will change overnight, forcing you to pivot to Plan B simply to survive. With that being said, there are five primary reasons why small businesses fail.
Reason #1: Failure to plan
There’s a reason why the old adage “failing to plan is planning to fail” is so popular and has been around so long. It’s true – those small businesses that fail to do all the upfront planning have a much lower likelihood of achieving eventual success. That upfront planning includes a number of different factors, such as doing a simple market research study to find out how much potential demand exists for your product at a variety of different price points.
The best way to plan, of course, is by putting together a full business plan that clearly defines what you plan to offer in the marketplace, how you plan to win over new customers, what the competitive advantages of your business are, and how you plan to win market share from other rivals. By planning in advance, you might realize that a strategy of being the “low cost provider” might not be effective if you can’t generate enough sales volume to make that strategy effective. There’s a reason why companies like Walmart or Amazon can offer such bargain-bin prices – they are huge behemoths with massive economies of scale and a huge, built-in customer base. Startups that try to mimic this strategy, though, are rarely successful – and that’s true even for industries where Walmart or Amazon are not present.
Reason #2: Cash flow and liquidity problems
You need cash flow to pay your bills, it’s as simple as that. Thus, when your business runs low on cash, it’s also running low on the very lifeblood of the business. An unexpected cash crunch could be disastrous, so it’s imperative to monitor cash flow and liquidity.
The good news is that there are a variety of proven business strategies that can help to mitigate these risks. For example, one very effective strategy is known as a cash flow matching strategy. What it means, in simple terms, is that more cash is not leaving the business than is coming in. If customers are taking 30, 45 or 60 days to pay, then you should be attempting to mimic those same payment terms with your suppliers. Another strategy is to minimize the amount of unsold inventory that is building up in your warehouse (or other storage facility). In a worst-case scenario, of course, you’ll end up with a warehouse stacked to the rafters with products you can’t sell.
Reason #3: Inability to grow market share
When you first launch a new business, you have exactly a zero percent market share. So, unless you make growing market share a fundamental part of your overall strategy, your business could be in for a long, tough slog. One important note here is that an inability to grow market share is not the same thing as the inability to grow revenue. It’s pretty obvious that if you can’t grow revenue, you won’t succeed. However, it’s not quite as obvious about growing market share. For example, you might be impressed that your sales have grown by 20 percent over the past quarter. But what if your rivals’ shares have grown by 30 percent over the past quarter? It would be much like playing a game of basketball, where you are consistently hitting all of your shots from in close to the basket, while your opponent is draining shots from the 3-point line. Before you know it, you could be in a competitive disadvantage.
Business consultants who are experienced in your niche or industry can often advise on how to grow your market share, gain traction, and generate sales momentum. Are you, for example, actively marketing your products to the right consumers in your market? What message are you using to target them? Most marketing messages are built around the basic “better, cheaper, faster” concept. So how is your new product better, cheaper or faster than those already in the marketplace? If your product looks just like every other product in the marketplace, and is priced just like every other product in the marketplace, that might help to explain why consumers are not switching over to your product.
Reason #4: Failure to execute
There is often a big gap between the articulation of a certain strategy and the actual, day-to-day implementation of that strategy in the marketplace. Think about it – the life of the start-up entrepreneur is often filled from morning to night with a series of “fire drills” – events that can quickly take on crisis proportions if they are not dealt with quickly and effectively. So is it any wonder that many startups appear to follow a twisting, turning strategic path, rather than a linear, step-by-step path? If you find that your business is having a tough time executing on its business strategy, that might be a strong signal that it’s time to hire a business coach to help you find your way out of your strategic rut.
Reason #5: Inability to pivot when market conditions change
Risk and uncertainty are an everyday part of being a small business entrepreneur. However, that doesn’t mean that you can ignore these risks and hope that they disappear. Businesses need to plan for every possible contingency, and be prepared for the very worst. It’s much like having an insurance policy in place – you can ‘t prevent a completely unexpected event from happening in the first place, but you can certainly take steps to make sure that your business is not going to be wiped out if it does. One big buzzword these days is “resiliency,” referring to the need for businesses to be resilient in the face of any market hazard.
Small businesses fail for a variety of reasons. But a lot of those failures are more similar than you might think. For that reason, it’s worth paying attention to this list of 5 major reasons why small businesses fail. Are you making any of these same mistakes? If you are, it’s time to turn to proven, market-tested tools and approaches to insulate you from market risk and uncertainty.
If you want to learn more about how to make your new business startup more resilient, check out the My Business Coach – Growing Your Business tutorial.