Top 3 Reasons Most Small Businesses Fail—and How to Keep Yours Afloat
Within the first year of getting off the ground, most small business owners will be forced to ask themselves: How do I keep my business from failing? Unfortunately, half of all small business owners will get the answer wrong, and their businesses will go under within five years of opening. Further down the road, in ten years, only a third of all small businesses have survived. That’s why every aspiring entrepreneur and new business owner should be thinking about the question why do small businesses fail? now.
It’s not a new question, and there are answers, but they aren’t getting to enough of the folks who need them most.
What can a small business owner do to reduce the risk of failure? To answer this, we’ll look at the top three reasons small businesses fails and explore some ways to avoid these common pitfalls.
Why do small business fail?
1. Cash flow trouble
It won’t come as a surprise that trouble with cash flow is the number one reason small businesses fail. Money won’t buy you everything, but it will buy you time to nurture and grow a successful business.
It’s rare that a new small business already has a consistent customer base and regular income stream. The more likely situation is that the first year is the most challenging in terms of managing cash flow.
Even the best-laid business plans end in disaster without the capital to keep the business going. Thankfully, there are ways to avoid cash flow problems.
First, ensure that you have the proper access to capital in place before starting your business. One way to estimate how much capital you’ll need to stay afloat that first year, while you build out your customer base, is to have a rock-solid business plan. The plan should take into account all your expected (and some unexpected) costs. If you’re unsure about your projected operating costs, be sure to avail yourself of a mentoring service like SCORE, or check with your local SBA office, where experts can help you plan a realistic budget. Once you have a good sense of your budget, be sure to get the loan that’s right for your business, taking into account your projected operating costs for that risky first year.
Second, manage your money. This may seem like a simple way to stay on top of your cash flow but many small business owners fail here. Too often a business will be profitable but end up failing as a result of poor accounting practices. A good rule of thumb here is that you need to know, down to the penny, how much money is coming and going out of your business. This means having a reliable accounting system. There’s a lot of software out there, much of it free, that can help you keep track of what’s coming in and what’s going out.
It also means not spending all the money that comes into the business. Once you’ve covered your operating costs—and stocked up on ramen for the month—you should be consistently building up your reserve funding. All businesses have (a lot) of ups and downs, and it takes awhile to develop a keen sense of whether this year or the next will be feast or famine for your business. That’s why you always want to have financial reserves available to see you through the tough times.
2. Hiring the wrong people
You would never settle for selling subpar products or services, so why would you settle for subpar employees? The bottom line is that bad hiring is really bad for your bottom line.
When you’re operating on a thin profit margin, it’s tempting to try and cut costs when it comes to hiring. Often this means not giving employees the proper training, not retaining good employees, or maintaining a revolving door of staff. Your customers’ satisfaction with your business is based on the experiences they have as your customer—interacting with your employees. If your customers are leaving with a bad taste in their mouth from unhelpful, rude, or incompetent employees, those are customers you’re going to lose. And even before potential customers get their feet in your door, many of them will have checked out your business’s Yelp reviews in order to decide whether or not to patronize your business. If they see negative reviews, they may think twice before becoming a customer.
The reality here is that spending the extra time and money to hire, train, and retain the right people—while costing more up front—will invariably save you a time and money down the road. Making the wrong choice and employing the wrong people can lead your business down the road to ruin.
3. Poor planning
The world is full of unknowns and it would be a pretty boring place if that weren’t the case. However, when it comes to planning your small business’s future, the unknown can be the difference between success and failure.
“Planning” might seem unhelpfully generic as a piece of business advice. But, what we mean here is specifically the kind of planning for the future that can save you a lot of problems (and money) down the road. It can vary from industry to industry.
This kind of planning can mean understanding your competition through market research before opening your business, knowing your present and expected budget and calculating it correctly, or it could mean being aware of rising commercial real estate costs and preparing for a potential rent hike. Whatever it might be for your particular type of business, to be successful, you will need to have a plan in place for how you handle potential as well as predictable risks and opportunities that will arise.
Small businesses struggle enough with all the volatility inherent in our economy. Even the most thoughtfully planned and successful businesses can come to an end for reasons that are simply beyond the control of anyone involved. Still, there are some very common reasons for failure that can be avoided.
Negative cash flow, hiring the wrong people, and poor planning can all lead a business to failure. One thing that will increase your chances of business success? Having access to the right information at the right time. And here comes the shameless plug: An easy (and free) way to do that is by having your own network of fellow small business owners and experts on Townsquared or join us at one of our local events.