8 January 2024

10 Reasons Why Small Companies Fail

By Ronald Smith

I don’t want my small business to fail, but the truth is that many do. And the younger the business is, the higher the chances of failure.

I learned from the SBA Office of Advocacy (PDF) that around two-thirds of businesses with employees manage to survive for at least two years. However, only 50 percent of them make it to the five-year mark, and only one-third celebrate their 10-year anniversary.

The SBA states that the rates of businesses going out of business haven’t really changed in the past 20 years. This applies across various industries such as manufacturing, retail trade, food services, hotels, and construction.

So, why do small businesses fail and go out of business?

Unfortunately, the reasons are numerous and all too common. Here are ten to consider, along with advice on how you can prevent disaster before it strikes.

The Reasons Why Small Companies Fail

1. Starting for the Wrong Reason

Did you know that every month, more than 500,000 businesses are started? It’s a lot, right? But here’s the thing, many of them begin for the wrong reason. Let me share a story with you.

There was an electrician who used to work for a building contractor. One day, he thought to himself, Why should I work for someone else? I can make more money if I start my own company! So, he took the leap and started his own business.

However, what he didn’t realize was that running a business is not just about having the skills for the job. It takes a whole different set of skills to manage a company successfully. Unfortunately, he didn’t have that acumen. As time passed, his enthusiasm dwindled, and he realized that running a business was tougher than he thought. He made the tough decision to close down his company and happily went back to working for his old boss.

Unlike that unfortunate electrician, you have a much better chance of succeeding if you start your own business for the right reasons. And what are those reasons? Well, first and foremost, you need to have a passion for what you’ll be doing. It’s that burning desire that will keep you driven and determined, even when others give up.

Another important reason is having a positive mindset. As an entrepreneur, you’re bound to face obstacles and setbacks. But with a positive attitude, you can overcome any challenge that comes your way. Remember, success is not always about being the smartest or the most talented. It’s about staying optimistic and refusing to give up.

Lastly, you need to be willing to learn. Running a business requires a wide range of skills, from marketing to finance to operations. If you’re not open to acquiring new knowledge and developing these skills, you’ll find it difficult to navigate the entrepreneurial world.

2. The Dangers of Insufficient Capital

Now, let’s talk about the importance of having enough money to start and run your business. Starting a business without sufficient operating capital is like stepping onto a sinking ship. It’s almost a guarantee that you’ll go under before you even get started.

But it’s not just about having enough money to get things off the ground. Many new business owners underestimate the roller coaster ride that is cash flow. One month you might be swimming in profits, and the next you could be barely making ends meet. If you’re not prepared for these ups and downs, your business could suffer.

In fact, a study by Hiscox revealed that 21 percent of US entrepreneurs have resorted to using their personal credit cards to fund their businesses. This is not a sustainable or wise approach. It puts your personal finances at risk and can lead to a whole host of financial problems.

Do you know what caused one marketing consultant to lose his business? It wasn’t because he wasn’t good at his job. No, it was because he didn’t manage his cash flow properly. You see, he was used to getting a regular paycheck, but as a business owner, he soon realized that clients can take a long time to pay. Weeks, or even months. And when his clients took their time, he had to find a way to stay afloat. So, he took out expensive loans just to survive. But in the end, it wasn’t enough. He had to close his business and look for a job elsewhere.

That story taught me an important lesson: I need to protect my capital before I even start my own business. Having a safety net for those times when money is tight can make all the difference. According to Hiscox Business Insurance, did you know that one third of small business owners don’t have insurance? And here’s something even more surprising: one in three small business owners get sued, even if they haven’t made a mistake. Can you imagine? And fighting lawsuits can cost a lot of money, money that could be better spent on growing your business.

So, what’s the solution? Get the right liability insurance for your business. It’s the first step in helping you manage your cash flow better. With the right insurance, you’ll have a safety net when things get tough. You won’t have to worry about expensive loans or watching your hard-earned money slip away. Instead, you can focus on what you do best: running your business and making it a success.

Before I even think about starting my own company, I need to figure out how much money I’m going to need. I have to cover all the costs of getting things up and running, and I need to have enough money to keep the business going for at least the first year or two. It’s not an easy task, but luckily there are tools that can help me with this. One great resource is a startup calculator from the Wall Street Journal. It’s a handy tool that can give me a better idea of how much money I should be budgeting for. It’s definitely worth checking out. But it’s not just about using a calculator, I also need to talk to someone who knows about finances. A financial advisor or a SCORE mentor can give me some guidance and help me make a solid plan for the financial side of my business.

3. The Danger of Not Planning Properly

One of the biggest mistakes that small companies make is not planning properly. It’s easy to get caught up in the excitement of starting a business and forget about the nitty-gritty details. But those details are crucial to my success. If I want to make my dream of financial independence a reality, I have to take the time to create a strategic business plan. This plan needs to consider all the important factors like what kind of workforce I’ll need, who my competitors are, what my sales and expenses will be, and how much I should budget for marketing. It may seem like a lot of work, but it will definitely pay off in the long run.

Once upon a time, I was a budding entrepreneur who was really excited about the idea of owning my own salon. I jumped right into starting my business without even checking if the area could support it. Unfortunately, no matter how hard I tried, I just couldn’t attract enough customers to keep my salon open.

To make sure you have a better chance at success, I strongly recommend taking the time to create a solid business plan. Luckily, there are plenty of software options available that can make this task easier and faster. Your plan doesn’t have to be a huge document – some companies even offer one-page plans. Regardless of the length, planning is absolutely crucial.

Problem #4: Poor Management and Leadership

If there’s one thing I learned the hard way, it’s that good management and leadership skills are absolutely vital to the success of your business. Without them, things can quickly become chaotic and confusing. Poor leadership can lead to low morale and decreased productivity among your employees.

Prioritize acquiring the skills you need to strengthen areas where you know you’re not as strong. Read books about leadership from authors like John Maxwell, Stephen Covey, Peter Drucker, and Sheryl Sandberg. You can also join peer advisory groups like Vistage or take online leadership courses from Dale Carnegie.

Here’s the bottom line: Your employees look up to you for leadership, so take charge!

5. Growing too fast

Some companies have gone bankrupt because their owners tried to expand too quickly without the necessary resources.

When considering expansion, I must carefully review, research, and analyze what I will need in terms of new employees, facilities, and systems. It may be possible for me to handle much of the work myself at the beginning of my business, but that won’t be the case after I expand. It is important to remember that progress made slowly and steadily is what brings success in the end.

6. Neglecting Advertising and Marketing

There is an old saying that goes, When business is good, it pays to advertise; when business is bad, you have to advertise.

Many companies fail because their owners neglect to promote and market their products or services. Simply relying on the idea of if you build it, they will come doesn’t work in this day and age when consumers have countless options. You must make an effort to get your message seen and heard.

Did you know that having a website is one of the best ways to promote your business? It’s true! Even though it’s now 2016, almost half of all small businesses still don’t have a website. Can you believe that? According to a report from Clutch, a research firm, 46 percent of small businesses are missing out on this opportunity.

But guess what? You can stand out from the crowd just by creating your own website. And don’t worry, it’s not as difficult as it may seem. There are plenty of user-friendly platforms that can help you get started.

While you’re working on your website, why not also set up profiles on social networks where your customers hang out? It’s a great way to connect with them and showcase your business. And hey, why not start an email newsletter too? It’s an awesome way to keep your customers in the know.

Oh, and don’t forget to advertise on Google and Facebook! It doesn’t cost much and it’s an effective way to build your online presence. Trust me, it’s totally worth it.

7. Not Standing Out

Have you ever heard of the term Unique Value Proposition (UVP)? It’s a fancy way of describing what makes a business special and different from its competitors. The problem is that not many businesses actually have a UVP, or they just don’t know how to explain it clearly.

Luckily, there’s a tool called the Value Proposition Canvas that can help you figure out your value proposition. It shows you how you create value for your customers and even helps you come up with new products and services that they’ll love. Once you know your UVP, it’s important to communicate it clearly to both your customers and your staff.

8. Not Letting Others Help

I have noticed that as an entrepreneur, I often become my own worst enemy by wanting to do everything on my own. Let me tell you about a CEO I know who runs a small engineering firm. Even after 10 years of being in business, he still finds himself emptying the dishwasher in the break room.

Maybe you can relate to this mindset. I used to think, No one can do it better than me. Or maybe you’ve said to yourself, If you want something done right, you have to do it yourself. And there’s also the fear of not being able to trust anyone else with important responsibilities. But guess what? This kind of thinking can lead to feeling overwhelmed and burnt out.

So what’s the solution? Well, it’s all about learning to delegate. Instead of insisting on doing everything yourself, it’s important to delegate certain tasks to others. For example, you can delegate tasks like emptying the dishwasher while you focus on more important things that help your company grow, such as casting a vision for the future and preparing others to take on leadership roles.

9. A Business Model That Doesn’t Make Money

Let me tell you something, just because you have a business idea that gets you all excited, it doesn’t automatically make it a good one. Trust me, I’ve been there. That’s why it’s important for you to create a business plan, do some marketing research, and seek advice from people who know what they’re doing. Believe me, it can be a real lifesaver.

And hey, don’t forget to ask yourself some tough questions. Like, is there really a customer base for this product or service? Is there a proven way to make money from it? And how long will it take you to get this business up and running, and how much will it cost you?

10. Don’t Underestimate the Competition

I gotta be honest with you, there’s one big reason why a lot of companies go out of business: they underestimate the competition. It doesn’t matter if you have a solid business plan, plenty of funds, and the skills to succeed. The competition can be pretty fierce, my friend.

Being in the retail trade can sometimes feel like being a small fish in a big pond. Especially if you’re surrounded by those big box stores that seem to have it all. It can be tough to compete, especially when there are disruptive startups out there, constantly innovating and coming up with better, cheaper, faster, and more convenient products.

But don’t worry, there are ways to level the playing field. One of the best things you can do is conduct a competitive analysis as part of your overall market analysis. By thoroughly analyzing your competitors’ strengths and weaknesses, you can develop strategies to improve your own competitive advantage and increase your chances of success.

So, let’s dive into it! Take a close look at your competitors and see where they excel. Maybe they have a strong online presence or offer unbeatable prices. Identify these strengths and figure out how you can match or surpass them.

But don’t stop there. It’s equally important to identify your competitors’ weaknesses. Perhaps they have a limited product range or provide poor customer service. By analyzing these weaknesses, you can find opportunities to capitalize on and differentiate yourself.

Once you have a good understanding of your competitors’ strengths and weaknesses, it’s time to act. Implement strategies that will give you a competitive edge. This could involve improving your online marketing efforts, enhancing your customer experience, or even offering unique products or services that your competitors don’t have.

Remember, you may be a David surrounded by Goliaths, but with a well-executed competitive analysis and the right strategies in place, you can slay those giants and thrive in the retail trade.