Not every small business is a success story, but it's not impossible to make a small business work. It's important for entrepreneurs to be aware of major reasons that small businesses fail so they can take steps to prevent such problems from arising in their own companies.
Ten Major Factors Leading to Small Business Failure
According to the U.S. Small Business Administration (SBA), small businesses that don't make it may fail for any number of reasons. Ten of the most common causes include:
1. Insufficient Capital
According to an Inc. Magazine article, running out of money is the top reason for small businesses to fail. Entrepreneurs who fail to accurately predict how much money they will need to get started and continue operations often find themselves running out of funds before they are able to get their companies off the ground. The same is true for those who spend money too quickly in anticipation of future success.
2. Inefficient Operations Practices
Small business owners, particularly those who have backgrounds working with large, well-funded enterprises, often apply big-business mindsets to their purchasing decisions. If you lease the best office space, buy the most recognized brand-name equipment and pay top-of-the-market salaries to your employees when you are just starting out, you may not be making the most of your resources.
A 2012 BusinessMonthly.com article cites operational inefficiency as one of the major factors leading to early failure of new companies. That's why it's essential for small business owners to find the balance between acquiring what they truly need and over-spending in order to have a fair chance of success.
3. Growing Too Quickly
Growth can be good, but it also involves risk. As illustrated by an article on the GrowThink.com blog, growing too quickly can backfire. If your company grows too quickly, you may find yourself in the situation of taking on more work than you have the resources to complete, leading to shoddy results and/or a decision to taking on additional debt without thinking through the consequences.
4. Excessive Debt
The Virginia Small Business Development Center cites over-borrowing as one of the most common reasons for business failure. If your business has too much debt, you'll find yourself - in essence - working under the control of creditors rather than being able to work toward building an operation that is sustainable for the long term. It is very hard to dig out of a cycle of debt when current revenue is already obligated to cover past expenses.
5. Lack of Demand
A 2011 article on FINS.com cites poor demand as the reason that many new business ventures fail to take off. It stands to reason that if there is not a market for the product or service that your company is offering, there is no way that your company can be successful, unless you are willing to reevaluate what you are doing and make significant changes - and you have the time, capital and commitment to see them through. This is true whether you are trying to build a business in an industry where consumers don't see value in the products and services that you have to offer, as well as those where markets are declining due to technological advances and other factors.
6. Inability to Compete
Being unable to gain a customer base in a competitive market can lead to small business failure. This factor can be related to entrepreneurs who try to enter a market where competition is already high, as well as those where their initial success encourages new competitors to enter the market.
Competition problems can arise as a result of the sheer number of competing businesses, but that's not the only potential problem. If competitors can offer similar products and services for lower prices, if their offerings provide value that yours do not offer, or if they have financial clout that you do not, it may become impossible for your company to hold its own. As a 2011 New York Times blog post on reasons for small business failure points out, it can be difficult for startups to compete against large, established corporations who have solid financial backing and significant purchasing power.
7. Poor Business Planning
Poor business planning is included on virtually every list that exists regarding reasons for small business failure. Whether you are in business by yourself or if you have partners, establishing and following an effective business plan is critical to success. Ideally, you should have put together a solid, well-researched plan before you ever got started. If you have not already taken care of this important task, do it now. Once you have a plan in place, review it regularly and make adjustments based on what is going on with your enterprise in order to avoid being taken by surprise if things start to go sideways.
8. Entrepreneurial Burnout
While this isn't one of the most frequently discussed potential reasons behind small business failure, it's a fact that being an entrepreneur can be absolutely exhausting. As is pointed out in an Entrepreneur Magazine article, the cycle of working nearly countless hours - often without seeing financial gain - can cause small business owners to start looking for a way out. If you allow yourself to become so exhausted that you see your business as a burden rather than a calling, you may simply decide that it's not worth the effort. The result can be a conscious decision to walk away, or a chain of actions and decisions that ultimately result in your company going out of business.
9. Failure to Separate Personal and Business Finances
A Houston Chronicle article lists financial management problems associated with blending personal spending and business finances as being one of the biggest problems leading to small business failure. When business owners look at company revenues as funds that exist to cover their personal expenses, this can lead to significant financial consequences, ranging from tax issues associated with improper accounting practices to bankruptcy.
10. Lack of Effective Exit Strategy
According to the SBA, it's critical to have contingency plans in place regarding what will happen if one or more partners depart from the business, either by choice or as a result of unavoidable circumstances such as disability or death. Business owners who do not have solid buy-sell agreements and a solid succession plan in place often find themselves in dire circumstances when a partner leaves the company.
Small Business Survival Statistics
According to information provided on the SBA's frequently asked questions page, 69 percent of small businesses that opened in the United States in the year 2000 stayed in business for at least two years and 51 percent of those companies stayed in business five or more years. Taking steps to avoid these mistakes will help keep you and your company on the positive side of the statistics.