6 Reasons Why Small Businesses Fail (and 6 Tips for Sustainable Success)
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Meta description: Want to launch a new business? Discover why small businesses fail and how to position your new venture for sustainable and continued growth.
Reasons Why Small Businesses Fail (and 6 Tips for Sustainable Success)
1 in 5 small businesses fail within the first year.
For those that survive, less than 50% make it to five years, and only 33% hit the 10-year mark.
These numbers are alarming, especially for rookie entrepreneurs looking to dip their toes in commerce. But do they tell the whole story?
Small enterprises make up 99.9% of the US economy and employ a whopping 61.6 million people. These numbers point to a vibrant sector with immense money-making potential.
So why do some small businesses fail? What differentiates an enterprise that crushes and burns upon launch from one that rockets to the top of the industry and remains there for decades?
In this guide, we dissect six reasons small businesses fail and six ways to ferry your new venture to its 10th, 15th, and 20th anniversaries.
First things first: why should you open a small business?
Why should anyone?
Large corporations like Google, Tesla, and Amazon dominate the news, so much so that you might think they form the country’s economic backbone.
However, if the numbers quoted above are to be believed, and they are, small businesses employ 45.9% of the US workforce. This is despite the fact that only 20% of small enterprises even require a workforce.
At a personal level, owning a business gives you the most control over your hours and income. It grants you:
- Direct access to your customers
- More opportunities for growth and expansion
- Control over your branding message and marketing strategy
- Complete leadership rights over your team
Operating a small business alone or with a small team forces you to fill multiple roles within the company. While challenging, this setup grows your skillset and diversifies your professional experiences.
Small businesses also enjoy less bureaucracy, giving you the freedom to communicate with your customers, market your products, and reward your employees as you see fit.
Why do small businesses fail?
The reasons why small businesses fail run the gamut from cash flow problems to family disputes. Most commonly, however, small businesses fail due to:
Insufficient funding and cash flow problems
38% of small businesses fail because of financing. Some business owners fail to secure the capital they need to get their idea off the ground, and others run out of cash partway into their venture.
The latter is because, beyond securing the funds necessary to run a business, successful business owners must also balance their expenses and income. Failing to offset personal and business costs like rent, inventory, and payroll against your sales can compromise your cash flow, weakening your business.
Insufficient market demand
Another reason small businesses fail is that they offer products or services that consumers do not need. In fact, insufficient market demand shuts down 35% of small businesses.
Businesses thrive on continued and growing demand. If consumers do not need what you are selling, your products will remain on the shelves, and your cash flow will dry up, effectively killing your business.
And if you think running a business without capital is hard, try running one without customers.
Poor branding and marketing strategies
But simply offering a product consumers want is not enough to keep you in business. Many small businesses also fail because they do not factor marketing and branding into their business plans.
In an industry chockful of competitors who have been in business longer than you, you must woo your target consumers into buying from you.
Customers will ignore your product or service, no matter how good it is, if they do not know about it or do not like your branding message.
Inflexibility
You may also lose customers to technology.
Tech is constantly changing, and with it, how businesses operate. Innovations like AI and blockchain revolutionize how consumers interact with products, making operations faster and more efficient.
As a small business owner, failing to evolve alongside the tech industry puts you at a disadvantage.
If your customers cannot depend on you to offer the latest solutions, like, say, digital payments, they will find someone who can, which will lower your income.
Noncompliance
Elsewhere, small businesses fail because they breach local and federal regulations surrounding:
- Employment, immigration, and global hiring
- Payroll and overtime
- Zoning and property laws
- Business structure, and
- Taxation
Failing to comply with business laws exposes your business to penalties, litigation, and government sanctions. It also tarnishes your reputation in your industry and limits your credibility with consumers.
Ineffective leadership
Lastly, some small businesses fail because of ineffective leadership.
Running a business means being the boss.
Exciting as this sounds, it also means the buck stops with you.
Poor leadership practices like failing to recognize your employees’ efforts or communicating poorly lower your team’s morale and increase your turnover rates. This, in turn, raises your hiring and training costs and calls into question your reputation as an employer.
Unmotivated employees are also less likely to engage with customers, convert leads, and close sales effectively and on time, which hurts your bottom line.
How can you keep your small business running for longer?
You’ve already taken the most important step: learning why small businesses fail. With these pitfalls in mind, give your business the best chance of success by:
1. Securing early funding and budgeting effectively
Look into favorable business loans for small businesses before launching your business. Some banks are willing to leverage your assets and fund your first few years of operation.
If you cannot access traditional funding, consider alternatives like:
- Government funding
- Personal savings
- Donations from friends and family
How much capital you need depends on your business plan and industry. Some estimates suggest an average of $30,000 for small businesses and between $2,000 and $5,000 for home-based enterprises.
Remember to budget your personal and business costs for the first year since your business will not be profitable immediately, and once you secure funding, manage your cash flow by:
- Streamlining payments
- Optimizing your inventory, and
- Consulting a financial advisor on budgeting techniques
2. Creating a strong Unique Value Proposition (UVP)
Offer value to consumers by refining your UVP.
Your UVP sets you apart from your competition. It is the answer to the question: Why should a consumer buy from you and not anyone else?
To avoid getting lost in the sea of competition (or providing a product consumers do not need), answer the following questions:
- What is your product?
- Is there a growing need for it in the current market?
- Who is your target consumer?
- What are their needs, preferences, and pain points?
- How will you meet these needs?
- Who are your competitors?
- What are their strengths and weaknesses?
- What are your strengths and weaknesses?
- What unique benefits do you offer consumers?
Creating a UVP not only tells you where your company fits within the larger market, but also who your target audience is and what they need. It allows you to offer value and attract demand.
3. Building a credible brand around your business
Branding is more than designing a logo and picking a color scheme. To create meaningful and lasting relationships with your target audience, define your mission and values. How do you treat in-store customers? Are you an eco-friendly brand? Do you respond to customer reviews?
A credible brand builds recognition and trust with your customers. You can leverage this trust to successfully market your products and services to your audience through your marketing channels.
4. Adapting to changing technologies
A strong brand is also adaptable.
Unlike large companies, which are weighed down by bureaucracy, you can adapt to changing technologies faster and with minimal fuss.
Adopt any innovation that helps you serve your customers better.
Some developments to look into include:
- AI and machine learning
- Cybersecurity
- VR and AR
- Internet of Things (IoT)
- Cryptocurrency
5. Complying with local laws and regulations
This is as simple as researching and complying with the local and regional laws in your area of operation. Consult with a compliance expert on maintaining compliance.
6. Taking leadership classes
Lastly, assume that simply having a business idea does not make you an effective leader. Learn how to communicate better, manage a team, collaborate with vendors, and market your brand.
Is that all?
No. But it’s a great start.
Visionaries and Ted Talks will have you believe that all you need to succeed in business is confidence and a dream. And as charming as these stories are, sustaining a small business takes planning and intent.
The most successful small businesses are born from solid, well-researched business plans. They offer a product that meets actual consumer needs and position that product for success through financial management, genius branding, and effective marketing.
Therefore, the final piece of the puzzle is you.
Go beyond your dream and put in real work. Use this guide to pack your business idea with all the gas it needs to keep running when the going gets tough (and it will).
Best of luck.
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