Understanding the Top 4 Reasons Why Small Businesses Fail
Launching a small business can be an exciting undertaking, especially if you’ve been dreaming about it for a long time. According to the Bureau of Labor Statistics, 20% of new businesses fail within the first two years of opening.
There are many reasons for this such as rigidity or inability to adapt to changing trends. However, the most common reasons why small businesses fail are poor planning, bad execution, market underestimation, and inadequate financing.
Poor Business Planning
You can’t build a successful business without a business plan. It’s like constructing a residential building without architectural drawings.
Here are some advantages of having a plan:
- Writing your business plan forces you to think beyond the present and anticipate changing dynamics in the marketplace
- Your business plan articulates your vision, mission, goals and objectives, strengths and weaknesses, marketing strategy, and budget. It serves as a guide for the corporate decisions you’ll make
- The financial section of your budget is key to helping you identify how much capital you’ll need to cover startup and operational costs. Running out of money is one of the leading causes of why small businesses fail
- Your business plan demonstrates to your stakeholders, including your employees and investors, that you’re committed to building a successful business
- By routinely monitoring your goals, you’ll be able to make pivots when necessary to get back on track
Bad Business Plan Execution
You may have written a stunning business plan, but you won’t make progress toward your goals if you don't use it. Keeping everything in your head is a recipe for failure. Frequent reference to your business plan keeps you on track.
Here’s why sticking to a plan helps you avoid bad business plan execution:
- One of your business plan's critical elements is your management structure. That is: staffing, responsibilities, decision-making, crisis management, and core values. If you’ve never managed a business before launching your small business startup, you could fail because of poor management decisions. Following the action items articulated in your business plan will help you avoid management mistakes that lead to failure
- Division managers and employees also benefit from the business plan. It proves that management decisions aren’t arbitrary, but are mission-focused and for the benefit of the business's long-term health. Delineating roles and responsibilities create a more harmonious working environment, with everyone on the team focused on the common goals of success
- The goals and objectives of the business plan include a timeline and action steps which helps avoid spontaneous decision-making
Business Marketing Strategy Underestimation
You may have developed a great product or service, but your business will fail if you don't have a good marketing plan. The marketing strategy that you created for your business plan wasn’t a one-time intellectual exercise. It should serve as a guide for your marketing team.
This is why marketing is critical to your businesses success:
- Many businesses, particularly when launching, limit their marketing budget. When economic times are uncertain, the marketing budget is usually the first to be cut. However, it’s a short-sighted approach. When you're a new business or facing challenging times, you need to make marketing a priority
- Your business plan's goals and objectives drive your marketing strategies. You’ve already articulated your consumer audience and have researched your competition. Your marketing approach should be in line with these findings
- When your marketing budget is limited, you need to be more strategic with the channels and tools you use. Effective marketing requires that you continuously check in with your audience.
Inadequate Small Business Financing
Lack of capital makes it difficult to grow your business. It creates cash flow problems that can impact your ability to meet operating costs.
Poor cash flow impedes your ability to take advantage of money-saving opportunities, such as buying in bulk or acquiring a competitor's inventory. You’ll jeopardize your relationship with suppliers if you’re unable to pay on time.
Below are a few considerations when it comes to financing:
- Structuring financing relationships with banks and alternative lenders is one way to improve your financial health
- Financing from banks and alternative lenders improves your cash flow, allowing you to take advantage of strategic maneuvers that result in business growth and long-term success. Short-term loans, to cover cash flow gaps, keep you in good standing with vendors and service providers
- You can use your loan to pay off high-interest debt, purchase equipment, and expand marketing and advertising activities, all of which protect your business's long-term future.
- Assuming your accounts remain in good standing, you’ll also improve your credit rating. The better your credit rating, the more favorable terms you’ll receive from lenders in the future
Even though the statistics paint a bleak picture, your small business can succeed. Creating and following your business plan, staying focused on your articulated goals and objectives, prioritizing marketing efforts, protecting your financial health through relationships with lenders, and remaining true to your mission will help protect you from small business failure.