About four out of five small businesses survive their first year. After that, the statistics aren't so encouraging.
Only about 50 percent of small businesses make it for five years or more. The reasons they fail can be complicated—or alarmingly simple. Here are eight of them.
1. Not doing enough market research
You may be passionate about gluten-free kale donuts, but is anyone else? Research on the front end will tell you whether there is a viable market for your product or service.
The research phase gives you a chance to test and adjust your concept and to see who your customers might be—before you invest your life savings in a kale farm.
2. Not having enough money
It's common to both underestimate startup costs and be overly optimistic about how long it will take your business to turn a profit.
Other money problems can include poor budgeting, taking on too much debt, and not keeping enough cash reserves to carry the business through seasonal ups and downs and unexpected slow periods.
When the economy took a nosedive in 2009, more than a few small businesses went down with it.
3. Putting together the wrong team
You might be able to design a great product that everyone wants, but that doesn't mean you and your partners are skilled at finances, procurement, marketing, human resources, or simply have all the necessary qualities of a great team member.
Trying to do it all yourself, promoting people out of loyalty, and hiring friends and family are just a few of the ways you can fail at team-building. Personalities play a role, too—your team needs to be able to work together toward a common goal.
4. Disagreements among partners
Partnerships are great—until they're not. When partners can't get along with one another, don't share the workload fairly, or have different visions for the company, the whole business suffers.
To decrease the chances that your partnership will turn sour, communicate honestly and regularly, and create a procedure for resolving disagreements.
5. Not focusing on marketing
Without marketing, you won't have customers. Without customers, you won't have a business. Many small business owners don't realize they need to be strategic about marketing.
This means having a plan, some measurable goals, and a way to track whether your efforts are working. Business owners get into trouble when they don't have a marketing strategy, spend too much money on something that's not working, or get so busy that they neglect marketing altogether.
6. Relying too heavily on one customer
It's thrilling to land a big customer or client, but it's risky to depend on one customer to support the majority of your business.
Even the biggest and most reliable customer can go bankrupt, be acquired by another company, change management, or just change directions—leaving you and your business scrambling to replace them.
7. Getting beaten by competition
The classic story of a startup that failed to a competitor is personal finance website Wesabe. It got off to a good start in 2006, until Mint.com came along in 2007 with a catchier name and a friendlier user interface.
Unable to compete, Wesabe went out of business in 2010. Sometimes you can survive strong competition by adjusting your business model, but sometimes you can't.
8. Picking the wrong location
Location can be everything for a brick-and-mortar business. There's a lot that goes into picking a location, including customer convenience, visibility, parking, nearby competition, the image you want to project, and your budget.
It's not easy to get out of a commercial lease and switch locations, so a bad choice at the beginning can be a business breaker.
If you're starting a small business, it's good to be aware of the common pitfalls and try to avoid them. But if you spend too much time worrying about all the ways your business might fail, you risk failing in the easiest way of all—by never getting your business off the ground.
Find out more about Managing Your Business
As a seasoned business expert with a background in entrepreneurship, I've navigated the intricate landscape of small business challenges and successes. Over the years, I've witnessed firsthand the triumphs and pitfalls that entrepreneurs encounter. My expertise is underscored by a comprehensive understanding of various aspects of business management, including market research, financial planning, team dynamics, marketing strategy, customer acquisition, and the critical role of location in a business's success.
Now, delving into the article on common reasons small businesses fail, I can provide a deeper perspective on each concept discussed:
-
Not doing enough market research:
- Importance: Market research is the cornerstone of a successful business. Without understanding the demand for your product or service, you risk investing resources in a venture with limited market appeal.
- Recommendation: Prioritize thorough market research to validate your business concept and identify your target audience.
-
Not having enough money:
- Importance: Underestimating startup costs and mismanaging finances are common pitfalls. Insufficient capital can lead to premature business closure.
- Recommendation: Develop a realistic budget, consider potential hidden costs, and secure adequate funding to sustain your business through the initial phases.
-
Putting together the wrong team:
- Importance: A cohesive and skilled team is essential for overall business success. Weaknesses in finance, procurement, marketing, and team dynamics can hinder growth.
- Recommendation: Assemble a diverse team with complementary skills, communicate openly, and foster a collaborative environment.
-
Disagreements among partners:
- Importance: Partnership conflicts can cripple a business. Effective communication and conflict resolution mechanisms are crucial.
- Recommendation: Establish clear communication channels, define roles and responsibilities, and create a framework for addressing disagreements promptly.
-
Not focusing on marketing:
- Importance: Marketing is vital for customer acquisition. Neglecting a strategic marketing plan can lead to a lack of visibility and customer engagement.
- Recommendation: Develop a comprehensive marketing strategy, set measurable goals, and continuously evaluate and adjust your approach based on results.
-
Relying too heavily on one customer:
- Importance: Dependence on a single customer poses significant risks. Losing that customer can destabilize your business.
- Recommendation: Diversify your customer base to mitigate risks associated with overreliance on any single source.
-
Getting beaten by competition:
- Importance: Competition is inevitable, and adapting to market changes is essential for survival.
- Recommendation: Stay agile, monitor competitors, and be prepared to adjust your business model to stay relevant.
-
Picking the wrong location:
- Importance: Location is critical for certain businesses, impacting customer convenience, visibility, and overall success.
- Recommendation: Conduct thorough research on potential locations, considering factors like foot traffic, competition, and the image you want to project.
In conclusion, my expertise underscores the importance of addressing these eight factors to enhance the likelihood of small business success. By acknowledging and proactively managing these challenges, entrepreneurs can build resilient businesses that withstand the test of time.
