According to Small Business Association (SBA), 20% of small businesses fail in the first year. About 50% fold up after five years. Sadly, only 33% make it to ten years or longer. This means that 67% of small businesses fail within 10 years. Let’s break it down: Assuming 100 small businesses were established in 2011, as of now (2021) only 33 of those businesses would still exist. That’s not even up to half!
Therefore as business owners, it is important to understand what leads to business failure and how it can be managed. So that you won’t fall in the category that does not make it to the 10years mark.
The most common reasons why small businesses fail are lack of capital or funding, inadequate management team, faulty or inadequate business model, unsuccessful marketing strategies, failure to adapt to the market, lack of research, bad partnership, failure to listen and understand customer behavior and failure to market online.
Why do small businesses fail?
- Financial difficulties or hurdles: A business owner should be aware of how much is needed in the running of the business. However, some business owners are not in tune with how much revenue is generated by the sale of products.
As a result of this, they spend more than they should. Thus, leading to financial shortfalls (and nothing puts a business out of operation more than this). Also, to beat the competition, some business owners price a product or service lower than that of their competition. Though this strategy can be successful, it could backfire if the prices are kept too low for too long. As a result of this, the cost of production, marketing, and delivery will outweigh the revenue generated; and this will lead to the eventual failure of the business. The solution to the problem of financial difficulties is to get a realistic budget and also source funds before needed.
2. Inadequate management: most business owners have the personal qualities they need to run a business but often lack the necessary managerial skills and are too busy to oversee other employees. These inadequacies in the management team would lead to the failure of the business in the long run. The solution is to outsource the activities the business owners do not perform well in to increase maximum output.
3. Inadequate and ineffective planning: A business plan before starting a business because, without it, the business is headed for failure. A good business plan should contain a clear description of the business, employee and management needs, opportunities and threats in the market, capital needs, budget, marketing strategies, and analysis of competition. It is also important to continuously assess the business plan so as to adapt to the changes in the market. The solution to inadequate planning is to have a solid understanding of the market in general. The company business plan must be in place and various sources of revenue should be projected.
4. Marketing mishaps: Business owners rarely prepare for the marketing needs of their companies — in terms of capital, target audience reach, etc. This makes it difficult to get more funds from other aspects of a business to meet marketing needs. The solution is to establish realistic budgets and have realistic projections in terms of audience reach and sales conversion rate.
5. Failure to Understand customer behaviour: Understanding who your customer is and what they want will help business growth. The reality is that most small business owners fail to study each lead or customer they have. Therefore, they lose out on important information about what they truly want. The biggest difference between a large business and a small business is how bigger cooperations focus and study their customers.
Other reasons why small businesses fail include failure to adapt to trends and market changes, failure to market offline as well as online, lack of research, bad partnership, etc.
How to prevent your business from failing
- Make adequate research about the market, competition and the industry in general before starting a business.
- Have a specific and comprehensive business plan.
- Get a working and realistic budget.
- Source for funds from multiple sources.
- Outsource and delegate tasks and duties.
- Prepare adequately for marketing needs.