Business Failure Rate Explained: 6 Reasons Why Small Businesses Fail
What are the real reasons why small businesses fail, while others manage to make it? What is it that causes 8 out of 10 companies to fail in the first 1 to 5 years? And if we know the main reasons for this business failure rate, can we prevent it from happening? Seems like we can!
As an entrepreneur, all the responsibility is yours.
You can’t blame it on the economy, your team, changes in the market, new competitors, etc. All these are outer factors.
How you try to prevent such negative influences is a matter of preparation, ability to take risks and staying calm in the face of adversity.
In this article, you’ll learn the real reasons behind this unpleasant rate in the business and startup world. Once we know why new businesses fail, we can see what not to do in order to succeed.
Learning from the mistakes of others is a powerful tool on the way to success. So, let’s see what so many companies have done wrong in their first years that led to business failure.
Top Reasons Why Small Businesses Fail
Keep in mind that the reasons below may apply to anyone in business.
That’s the lifestyle blogger making a few thousand dollars a month and wanting to turn it into a passive income driven business.
The aspiring entrepreneur who has plenty of ideas in his mind and is ready to execute.
Those who’ve been in business for some time but have just now decided to scale. It could also be the enthused startup founder, the lifestyle business owner, the employee hustling on the side, the stay at home mum.
Use the mistakes of others to carve your path to business success. Here’s what you might be doing wrong without realizing that could potentially lead to failure:
1. Not validating your idea.
The number 1 reason why new businesses don’t make it in the long run is that they fail to validate their idea.
Which means they (even if it’s a one-man business) end up creating a product or offering a service that no one is interested in using or paying for. That’s a waste of time and resources, although some good life lessons can come out of such an experience.
But if you invest all you have in this first company you’re trying to get off the ground and see it fail, not make any money and bring no customers, chances are you’ll give up.
But hey, so many people failed before they succeeded. Walt Disney’s first few businesses failed. Colonel Sanders, founder of KFC, was fired many times before he saw his dream become a reality in his 60s. How crazy is that!
And what about Elon Musk, founder of Tesla and SpaceX, who’s been having a vision to colonize Mars from a young age? He’s now a billionaire and one of the innovators of our generation, often referred to as the 21st century Thomas Edison. Well, he failed badly plenty of times too.
One of the surest ways to prevent failure in your business is to validate your idea before you ever start building anything.
That’s a simple process and it’s better to set aside enough time for it. Once an idea is validated, then you can be sure you’ll make money from whatever it is that you’re working on.
Start by researching the market to see if there’s enough demand. Create a profile of your ideal customer even before the company registration. Find where such people spend time online and reach out to them. Get their feedback. See whether there’s interest in your product. Define the problem it solves and use the language of the customer when promoting it.
Check out your biggest competitors and make sure they are earning enough. That means this niche is profitable. Ask yourself whether you can offer something better to get a piece of the pie.
2. Not understanding what the customer wants.
A business can’t succeed without its customers. Yet so many new entrepreneurs overlook this aspect and simply work on a business idea that sounds good.
In the end, they fail to differentiate themselves in the niche, to touch their clients, to use their language, to form a connection with them that can turn them into loyal customers.
Whatever your business is about, know that your main focus should be the needs and desires of your ideal client.
- Who is that person?
- Are you familiar with his demographics and psychographics?
- Have you actually talked to people like that to know how they describe the problem you’re trying to solve?
This point of the list summarizes a few of the reasons why small businesses fail. That’s having no real value proposition, regular dialogue with customers or going after the right customers.
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Avoid all these mistakes and save yourself the time, trouble and money, by understanding your target audience. Start today. Get in touch and keep the conversation going. These are the people whose thinking you need to be familiar with as they will be the ones using and buying your products.
3. Bad leadership.
Business failure also occurs when the main person behind the company is a bad leader. Why? Because that means he doesn’t take the right decisions, doesn’t spend the money right, doesn’t manage his people effectively, etc.
All these are crucial and that’s why bad management has become one of the key reasons why small businesses fail.
Here are some examples:
- Making decisions without taking into consideration how the outcome will affect anyone else involved;
- Not managing the company money well;
- Not finding the work/life balance that’s necessary to run a successful business;
- Lack of both short-term and long-term planning;
- Hiring people quickly;
- Not asking for help;
- Not paying enough attention to your budget;
- Spending too much in the beginning
- Working on too many businesses ideas at once;
- Not creating a positive work environment where everyone feels appreciated;
And more.
4. Partnering with the wrong person.
While it sounds good to start a business with your best friend from college, that’s almost always a pretty bad idea.
Friendship is one thing, doing business together is another.
That might lead to business failure because you aren’t sure if you have the same set of values. If your work ethic, spending habits and vision are similar enough to be able to combine them. If the other person will be able to handle the stress, crisis, long work hours and sacrifices that are part of entrepreneurship.
Think it through before starting a business with a friend.
Read also: When Disaster Strikes: Tips on Running a Business During a Crisis
5. Inadequate business plan.
Most businesses also fail because they have no business plan or just a bad one.
Why is this crucial to your success? Because a detailed business plan is what can help you understand your competition and how you fit into the market. They allow you to see the big picture of how much this can cost you and make a good plan on how to fit the budget.
A solid business plan can be the foundation of surviving in the first 3 years of business. In it, you can set measurable goals and deadlines, and create your overall strategy.
It’s thanks to this well thought out roadmap that you will be able to define challenges in advance and prepare for them. So make sure you create a detailed business plan.
6. Not adapting quickly enough.
With technology and the digital aspect of every business, new tools, strategies and models come every next day. Most often, a business owner needs to adjust and even change direction depending on what’s happening in the market.
Innovation is a never-ending process. But if you don’t know how to adapt to it, your business will fail early on.
To be adaptive as an entrepreneur might mean to develop new skills, introduce new technology to your team, follow new marketing trends, change features of your product based on customer feedback, etc.
Not doing any of these (when it’s necessary) could become the reason why your business fails. You risk being left behind in a thriving industry or losing clients because you can’t grow as quickly as your competitors. Don’t allow this to happen. Become adaptive and stay up to date.
So these are the main reasons why small businesses fail. As scary as it may sound, you still have a good chance of succeeding if you avoid the mistakes outlined above.
