4 Reasons Why Businesses Fail, and How To Make Sure Yours is Not One of Them

There are many reasons why businesses fail, including poor planning, bad execution, inadequate financing (or mismanagement of money), and market underestimation. According to the Bureau of Labor Statistics, as reported by Fundera, 20% of small businesses fail in their first year. You might think, “that makes sense.” But once you get past your first year, the odds should be in your favor. The failure rate increases, though. As many as 30% fail in their second year, and 50% of small businesses don’t make it past five years.

Let’s flip the statistics:

  • Roughly 80% of businesses with employees survive their first year in business.
  • 70% with employees make it past the third year.
  • 50% of small businesses with employees celebrate their 5th year.
  • Approximately 30% of businesses will mark ten years.

Last year was a nightmare for almost every sector of the economy. However, despite the thousands of businesses that shut their doors, many survived and thrived. We talked about them in our previous blog article, “Moving Past 2020: 7 Tips for Small Business Success in 2021.” We won’t focus on 2020 when looking into the reasons why businesses fail. Instead, we’ll look forward and highlight a few of the pitfalls to avoid so that you can scale your business from startup to industry leader.

Top 4 Reasons Why Businesses Fail

1.      Poor Planning

Make sure you have a business plan and use it. Your business plan sets your agenda and provides a roadmap to get where you want to go. Not having a business plan is like constructing a building without architectural drawings.

Your business plan is essential whether or not you need funding. Writing it helps you articulate why you’re in business, your vision and mission, and how you will achieve your objectives. Read our previous article about writing a business plan and how to get a bank loan. The financials in your business plan help you realistically plan for the lean times.

Know when to hit the “reset” button, when to adapt your business model or pivot. This lesson was learned over the past year as the world dealt with a pandemic that disrupted everything.

2.      Lack of Business Management Skills

You may have passion and be the best product designer in the world, but it doesn’t mean you know how to run a business. One of your business plan’s critical elements is your management structure: staffing, responsibilities, decision-making, crisis management, and core values.

Lack of business management skills is one of the top reasons why businesses fail. And it’s easily avoided.

  • Building a top-notch team is critical to the long-term success of your business.
  • Find people that complement you and cover the gaps in your skillsets.
  • Be sure your team shares your vision, goals, and objectives.
  • Don’t be afraid to delegate.
  • If you’re a solopreneur, look for expert contractors to take on your business’s essential elements, such as accounting and marketing.
  • Learn, network, take advantage of webinars, courses, mentorships, and other opportunities to improve your business management skills.

3.      Inadequate Financing Is A Top Reason Businesses Fail

Many small business owners make the mistake of taking on debt before they’re ready to handle it. If your cash flow isn’t healthy, you won’t be able to pay vendors, your lease or mortgage, or meet payroll. If you’ve taken on debt, commit to not spending any money other than what you need to operate the business until you’ve paid it off.

Take strategic measures to lower your operating costs.

Examine your supply chain. Maybe you love your suppliers, but are there other vendors and wholesalers who offer more competitive pricing?

How much are you spending on office supplies? Are you and your team making the most efficient use of your office supplies?

Pay invoices before the due date. Many vendors will give you a discount if you pay within ten days rather than the typical 30-day window.

If you need to raise capital, consider non-debt financings, such as equity financing, invoice financing, or equipment financing.

Maintaining a healthy cash flow impacts more than your ability to meet operating costs. It also empowers you to take advantage of money-saving opportunities, such as buying products and supplies in bulk or acquiring a competitor’s inventory.

4.      Inability to Effectively Connect With the Target Audience

You may have developed a product or service that is primed to disrupt the world. But one of the reasons businesses fail is because they don’t create an effective marketing plan. Many small businesses limit their marketing budget, especially in the early years when revenues are low. But, this a short-sighted approach. When you’re new or facing fiscal challenges, you need to make marketing a top priority. With a strategic marketing plan, you can prioritize the tools that will bring you the most success.

  • Identify your target audience.
  • Know their habits, personalities, needs, concerns.
  • Find out where they are and make sure you’re there too.
  • Provide your consumers something of value, such as the latest news and information, free tips.
  • Limit the “about me” marketing push.
  • Demonstrate your commitment to social activism.
  • Make sure you have outstanding customer service.

reasons why businesses fail

How to Bounce Back

  • Engage in constructive evaluation but not blaming.
  • Find the reason your product or service didn’t connect; redo your commercialization and marketing models.
  • Assess the source of failure: technology, vendors, too much reliance on a single set of customers?
  • Support your team through the experience, build a culture of respecting failure as a learning opportunity, help everyone look forward.
  • Hit the reset button: turn the mistakes into positives; remember you’re on a journey to business growth, and that journey might include an early failure.
  • Reconnect to the core of your mission, to the reason why you opened your business.
  • Stay focused on your commitment to be a small business owner.
  • Look for new solutions and be prepared to take risks.

Bottom Line

Some of the most well-known innovators thrived on business failure. It may not be the way you want to be remembered, but as noted at the beginning of this article, “failure is not fatal.” It took Edison 10,000 attempts before he finally succeeded in creating the light bulb.

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