The 5 Main Reasons Your Small Business Could Fail

Did you know that only 50% of small businesses make it to their fifth year successfully? (Source: U.S. Small Business Administration) Each unique business venture faces their own challenges, but there are some top reasons why businesses fail. Discover the top five reasons a business fails and eliminate some of the risk with proper preparation!

1. You failed to determine if a market for your product truly existed.

You may be passionate about a product, or find an interesting problem to solve as a business – but that doesn’t mean anything if people are not interested in buying your product. This CBInsights study lists ‘no market need’ as the number one reason why a startup failed. Before you invest money and time into a business, make sure that a market exists for what you want to sell. Otherwise you’re destined to fail.

Don’t rely on data research or focus groups to verify this market. Get out and actually test your product. Book a table at a local event or open a pop-up shop to see if people will actually spend their money on your product.

2. You didn’t understand the nuts and bolts of running a business.

You may be incredible at developing a product people want, but running a business entails more than that talent. If you’re great at what you sell but bad at everything else, your business will likely fail. You need to learn and adapt to succeed as a small business owner. Here are some tips.

  • Learn the basics of running a business if you don’t know already. Get a mentor, take some courses, anything to expand your working knowledge of these nuts and bolts.
  • If you know that you aren’t great at any of these necessary tasks, enlist help. This can be through hiring employees or outsourcing that work to a specialized firm.

Read our article, “The 5 Major Pros of Outsourcing Small Business Services” <Link to previous article> to discover how outsourcing business tasks could keep your business afloat.

3. You didn’t understand the product you were selling.

This Toronto Life article, “A Restaurant Ruined My Life,” starts with the sentence, “I was a foodie with a boring day job who figured he could run a restaurant.” That sums up one of the major reasons a small business fails – it’s started by someone who really doesn’t understand the business. You may/might be a great cook, but may/might not know a thing about how to successfully run a restaurant.

If you don’t already, get experience with the business area you want to run. For example, if you’re an aspiring restaurateur but have never worked in a restaurant – that’s a place to start. Work as a restaurant manager to understand the business model before setting out on your own.

4. There were unforeseen events that you didn’t prepare for.

When the Great Recession hit the economy in 2008, many small businesses were unprepared. Sometimes events happen that are beyond your immediate control. You may not even discuss these risks in your business model. But it’s important to plan for damaging events, even if you think it will never happen to you. These unforeseen events could include natural disasters, fire, lawsuits, medical emergencies etc. Luckily there are ways to lessen the blow of an unforeseen event.

  • Get excellent, reliable insurance! It can be tempting to ignore this ongoing expenditure, but when you need it – you’ll be thankful you have it.
  • Save enough money to cover business expenses for six months. If for some reason your cash flow is cut off, give yourself some cushion to solve the problem before you run out of money.
  • Build up a great staff! Have enough employees that if someone gets sick, there could be someone to come in and cover their shift. Also, if you ever have a medical emergency – do you trust your team to run your business without you? Hire and train your staff well in case you’re ever in that situation.

5. You developed serious cash problems, like lack of funding.

Revenue growth, cash flow, profit margins, investors, etc. Cash problems can easily be the death of your small business. CBInsights’ study named ‘ran out of cash’ as the number two reason why a startup failed. How can you avoid this common problem?

  • Always work to keep your overhead as low as possible. The less expenses you have, the higher your profit margin will be.
  • Keep your business modular if possible. If you’re running into issues, make it easy for sections of the expenses to be shut off without hurting the entire business.
  • Stay frugal even if you’re successful. Just because you have money in the bank doesn’t mean you’re beyond a disaster. Run a thrifty business no matter how much money you have.
  • If you’re running into money issues, consider pivoting to a new area of revenue growth. The best businesses adapt to the current market to stay successful.

This report from Wasp Technologies found that the majority of small businesses use these two strategies to generate more revenue.

1) Improve existing customer experience and retention rates.

2) Invest in new customer acquisition activities and methods.

Final Advice

If you’re considering opening a small business, it’s possible to achieve success with hard work and careful preparation. One of the best pieces of advice we can give you is to consult with a professional and/or mentor before taking the plunge. This outside opinion can help you see where your strengths and weaknesses lie, and assist you in avoiding the common reasons you could fail listed above.

Gift CPAs offers new startup & acquisition consulting for current and prospective business owners. You can find out if you’re truly ready to turn your passion into a profitable business venture. Find out more about the consultation service here.

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