Business failure is a topic most people starting small businesses would rather avoid. But the reality is a large portion of small businesses fail for various reasons. In almost every neighborhood, many small businesses come and go in no time at all. No industry is immune to business failure, and I learned many important lessons along the way when I set up my house cleaning company Happy Cleans.
What is the survival rate of small businesses?
Statistically, roughly 20% of new small businesses fail in their first year, 34% in their second year, and only 50% survive at least four years, with 30% making it past their tenth year. Therefore, business failure is real, and it’s one of the biggest hurdles to becoming an entrepreneur. While no one starts a business expecting to fail, many conditions can cause business failure. The good news is, you can put measures in place to increase your odds of running a profitable business when you understand what causes business failure.
This article explores some of the top reasons why small businesses fail and what you can do to avoid them. As a business owner, it’s important to understand why small businesses fail so that you can plan to avoid them.
Poor planning or no business plan
In most cases, small businesses fail because the owners overlook the importance of having an effective business plan before opening their doors. Without a comprehensive and actionable business plan, it’s impossible to define your unique value proposition, your customer base, competitors, and other important aspects of maintaining a sustainable business model. As the popular adage goes, failing to plan is planning to fail. Therefore, a business must have a strategic plan that details a roadmap toward success. A detailed business plan provides a clear roadmap that shows you where you are and the path you’ll follow to be where you want to be.
Another mistake that small businesses make is failing to update their business plan to reflect changes in the market. Many things do change along the way, from competitors to customer base and legislation. So it makes sense to review your business plan periodically to ensure it reflects changes in the industry.
Bad customer service
Every successful entrepreneur will tell you that the customer is the number one priority for any business that wants to succeed. A good number of small businesses fail because of poor customer service. Some of the customer service mistakes that have brought down millions of small businesses include; ignoring customer feedback, selling faulty goods, insulting customers, and compromising customer’s personal privacy, and many more. Bad customer service damages a business’s reputation and lowers conversion rate and customer lifetime value drops.
The good news is that small businesses can correct poor customer service and reverse any damaging effects that may have occurred. Some practical ways to ensure good customer service are hiring qualified customer service representatives, monitoring customer’s feedback to determine their pain points, and embracing full disclosure.
Cash flow problems
Some small businesses are outcompeted because they treat cash flow as an afterthought. In fact, 29% of small businesses fail because they run out of cash. As a rule of thumb, a business should maintain positive cash flow to avoid a crisis. Having a negative cash flow is a warning sign that you are running out of cash.
The following are some of the things that lead to cash flow problems:
- Low-profit margins
- High overhead costs
- Spending too much on startup costs
- Not keeping track of expenses
- Collecting receivables too slowly
Ways to fix cash flow problems for your business:
- Create a startup budget to avoid overspending when starting off
- Increase your prices, but find ways to offer more value
- Reduce the cost of payroll
Statistics indicate that 23% of small businesses fail because they don’t have the right team from the top management to employees. In most cases, new business owners lack business management expertise in various areas such as accounting, inventory management, sales, hiring, and employee management. Therefore, business owners should educate themselves on the skills they lack through mentorship or enrolling in leadership classes. Another remedy to this problem is to hire skilled employees who believe in your mission and outsourcing some tasks to professionals. A new business requires a strong management team that can make the right decisions. Of course, skilled teams cost a lot in salaries so you need to be careful not to overextend yourself.
Not measuring return on investment on marketing
Some new business owners set themselves up for failure by overspending on marketing. It’s important to determine whether the cost of marketing is helping or hurting your business. Your marketing efforts should bring in more revenue than the amount you are spending on marketing campaigns. Otherwise, you’ll be reducing your profits. Closely watch where you are burning money as the longer this goes on, the more chance you have of your business failing. Online marketing channels such as PPC can be unprofitable if not set up properly, or flyers can have a meager return on investment or even a negative one.
Inadequate cash reserves
Around 29% of small businesses fail because they run out of cash to meet their expenses and grow their businesses. Most new businesses don’t make profits during their first year in business. Some even take two years to break even. Therefore, businesses without adequate cash reserves are forced to close when they can’t keep up with business expenses and other emergencies. This can even happen if a business is growing as it is impossible to move forward without the necessary finances. Ideally, you are supposed to have enough cash to meet your expenses through the first six months or so before the business starts to reduce losses at least, and if you’re very lucky turn a profit.