Small business owners must mitigate company-specific risks while also bringing a complete product or service to market at a competitive price point for their target customer base. There are also cash flow strategies to navigate, employees to hire, invoices to pay, and many other considerations that go into running a successful business.
Managing these details can be especially daunting for startup business owners. Small businesses across a broad range of industries obviously perform well and maintain profitability, yet 18% of small businesses fail within their first year and 50% go out of business within five years. Approximately 65% of small businesses don’t make it to their 10th year in business.
Once any financial, personal, market, competitive and/or operational risks are addressed, small business owners can enjoy the unique rewards of entrepreneurship. Those benefits range from unlimited income-producing opportunities, the ability to “be your own boss,” and the pride of ownership that comes with building your own company.
5 Reasons Small Businesses Fail
To best prepare for the rigors of starting and running a sustainable business, entrepreneurs should be aware of the potential risks, determine which of them are most relevant to their own personal situation and then plan accordingly. Here are five reasons why most small businesses fail and some advice on how to avoid these risks:
- Lack of a solid business plan. Ben Franklin once said, “If you fail to plan, you are planning to fail,” and nowhere is this more evident than in the business arena. In fact, the National Federation of Independent Business (NFIB) says companies that put a plan in place early stand the best chance of success. Entrepreneurs use their business plans to outline their goals and objectives, secure funding, identify their potential markets, and track progress and adjust accordingly. “It’s common for new entrepreneurs to start a business related to their expertise and previous employment, or a favorite passion, pastime, or hobby,” the NFIB says. “But detailed market research and a thorough evaluation of your competitors must be done during the planning process, and businesses must be prepared to adapt to market changes on the fly.” At a bare minimum, the plan should include an executive summary, description of the business, marketing strategy, and financial projections.
- They can’t find the startup or growth funding that they need. According to Skynova®, an invoice template provider, half of all startups failed in 2022 due to insufficient funding or investor interest. “Nearly as many business owners simply ran out of cash,” the company says. The NFIB concurs, and says that a lack of startup funds—or, being unable to come up with adequate financing—are both common reasons for business failure. “If you lack the cash or assets to start on your own, like most businesses, you will need to borrow,” it says.
- Poor cash flow. According to SCORE, 82% of all small businesses fail due to cash flow problems. When money gets tight, paying yourself, your bills, the payroll and other financial obligations can be extremely difficult. This is why companies of all sizes keep a close eye on cash flow, or the net cash and cash equivalents currently flowing both in and out of your business. SCORE’s strategies to avoid cash flow problems include developing a minimum viable budget, protecting your credit (i.e., in case you need a loan to cover the bases when money gets tight), effectively managing your inventory (for product companies), and maintaining cash reserves for lean times.
- Inadequate management. It’s not at all unusual for a small business to be run by the same person who envisioned the idea, opened the company, and then worked hard to nurture and grow the entity over time. Along the way, that person probably wore a lot of hats: owner, manager, accountant, marketer - the list goes on. Unfortunately, this “chief, cook, and bottle washer” mindset can lead to one more reason why small businesses fail: lack of good leadership and management. “While the owner may have the skills necessary to create and sell a viable product or service, they often lack the attributes of a strong manager and don't have the time to successfully oversee other employees,” Investopedia points out. “Without a dedicated management team, a business owner has greater potential to mismanage certain aspects of the business, whether it be finances, hiring, or marketing.”
- Sometimes life just gets in the way. This “soft” risk that may not always show up on a business survey or report can impact a business’ lifespan. Because small business owners spend much of their time and effort on their companies, life-changing events like health problems, divorce, a new addition or a death in the family may adversely impact the business itself. In fact, when No Joke Marketing’s Michael Tasner asked over 100 entrepreneurs why their businesses failed, nearly 70% of them said their companies hurt their personal lives, or the other way around. To mitigate this risk, he suggests matching your business to your unique personality (e.g., he built a lifestyle marketing agency and designed its growth strategies around his lifestyle). He avoided trading off business success for life’s important experiences and garnered moral support from other business owners who may be dealing with similar issues or challenges. “Connect with like-minded people and share your personal and professional trials and tribulations,” Tasner adds.
When you know what small business owners have gone through to keep their companies afloat and headed in the right direction, you can better plan your own path to success. By understanding the financial, planning, and even the personal complexities associated with business ownership, you’ll be better prepared to tackle the challenges head-on, move past them, and increase your odds of long-term success.