8 Reasons Why Small Businesses Fail

Lee Polevoi by Lee Polevoi on August 31, 2012
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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.
Lee Polevoi

Lee Polevoi is an award-winning business writer specializing in the challenges and opportunities facing small business. He is former Senior Writer at Vistage International, a global membership organization of CEOs.

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