The 10 Most Common Reasons Small Businesses Fail

small business
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One sad fact you’ll need to face is that most small businesses fail within ten years. Why is that?

If you have a business or are thinking about starting one, you should know a few things:

  • 20 percent of small businesses fail within their first year, while 70 percent fail within ten years
  • Over 40 percent have no market for their product or service
  • 24 percent fail because they don’t have the right team in place
  • A whopping 82 percent have cash flow problems
  • 19 percent don’t or can’t keep up with their competition
  • 14 percent ignore their customers

Whether you’re brand-new to the business world or a seasoned business owner, these statistics paint a bleak picture.

Or do they? It’s also a fact that small businesses make up the backbone of the U.S. economy:

  • They make up 99.7 percent of our economy
  • We have 28.8 million small businesses
  • 48 percent of all U.S. employees work for small businesses
  • Despite the bleak picture painted above, 75 percent of small business owners are confident in their businesses

We’ve put together ten of the most common reasons small businesses fail, but we didn’t stop there. We’ve also provided resources and ways to research further. Knowing why small businesses fail will allow you to avoid the most common pitfalls.

1. Lack of Vision and Business Plan

business plans

You have a great idea for a product or service, but have you drawn up a business plan? A lack of planning is among the biggest reasons why small businesses fail.

A successful business owner develops a clear vision for their business’s purpose and mission in the world. Your vision lays out where you are now and what your goals are, and spells out where you want to be in the future.

Your business plan serves as your roadmap and vehicle to get there. It spells out the steps you plan to take to achieve your vision, the direction you’ll have to go, and how you’ll know when you get there.

Without your vision and business plan, you’re flying blind. It’s like taking a motorcycle trip without a clear plan for how to get to your destination. You could get lost, run out of gas, or find yourself too tired to keep going even though there’s no hotel in sight.

If you’ve done nothing to plan, you may not be well-prepared.

Running your business with a similar lack of planning will do the same things to you. You need that vision and business plan. You also need to maintain flexibility as things will crop up that you can’t foresee.

If you don’t know where to start developing your vision and business plan, try reading “Creating Your Business Vision,” by Mike Nichols, and “The One Page Business Plan: Start With a Vision, Build a Company!” by Jim Horan.

2. Failure to Deliver Value to Your Customers

Deliver Value to Customers

The foremost consideration for a business is how to deliver value. It’s easy to make promises in your marketing campaigns, but much harder to deliver.

It’s also easy to have your employees do their jobs to the letter while ignoring the need to provide your customers with a unique and memorable experience.

A lack of value is why small businesses fail, too.

You need your customers to talk. Word-of-mouth advertising is one of the most powerful forms of advertising there is. When you deliver a high level of value to your customers, you secure repeat business, and you gain new business as they tell their friends and family about you.

One strategy is to under-promise and over-deliver, but that’s not something you can do for every customer every time. A better way to deliver value is to give your customers a better experience than they expect for their money.

If you’re not sure how to deliver value, check out “Delight Your Customers: 7 Simple Ways to Raise Your Customer Service from Ordinary to Extraordinary,” by customer service consultant Steve Curtin. You’ll find many ways to work with your staff to deliver the value your customers want.

3. Lack of Communication with Your Customers

Communication with Customers

Poor communication is a common and primary reason why small businesses fail. Whether you’re running a promotion or having problems with an order, you need to keep your customers in every loop that concerns them.

Not following up with your customers after selling them your product or providing them with service can show them you don’t pay attention to details. It can also show that you don’t care whether customers come back to you.

Large corporations can afford that to some degree, but as a small business owner, you can’t. You need to remain in communication with your customers as much as possible.

Communication involves far more than these things, though. Making a positive first impression can make or break your business before you even get going. Talking to and treating your customers as real people instead of dollar signs goes a long way.

Even simple ideas, like putting a system in place to cut hold times down will improve communication. To learn how to communicate with your customers better, check out “How to Speak, How to Listen,” by Mortimer Jerome Adler.

4. Failure to Reach Your Target Audience

Target Audience

Every business needs a target audience. You can do everything else right, but failing to reach the target audience is a huge reason why small businesses fail.

Reaching and connecting with your target audience does involve advertising and marketing. Putting up signs advertising your business anywhere you like, for instance, won’t do much for you. You first need to identify your target audience. Men, women, children, everyone? Homeowners? Renters? People living in urban centers? Parents?

There are many different ways to determine your target audience, and they all depend on what kind of business you run. If you fail to identify your target audience correctly, though, you’ll never reach them.

You also need to determine your advertising budget, because if you’re a small business, you probably don’t have much of one. Social media is one great way to reach your target audience without spending too much money.

Having a website for your business, including a sales portal, is another one.

An older method for reaching your target audience is to go door-to-door, especially if your business involves helping other companies. You need to be careful using this method, though, as many places have “No Soliciting” signs and mean it.

If you want to learn all there is about marketing, reaching your target audience, and more, check out, “Creating an Effective Marketing Message: Leading Marketing Executives on Developing Communication Strategies That Articulate the Brand and Resonate with Target Audiences.”

Many marketing executives and experts contributed to this book, and it contains more information than merely reaching your target audience. You’ll find it well worth your time and money.

5. Failure To Compete And Win

Compete and win

Unless you’ve found a niche where no other business exists, you have competition. You know that whether you’re already a business owner or you’re starting out.

The hard part is figuring out how to compete against large businesses in your market or niche. They’ve already established themselves, built a customer base, and worse, you may have even seen other small businesses fail to compete against them.

That’s no reason to lose hope yet. You can find ways to compete, and even outdo your competition. You can provide a customer experience that your competitors don’t, for instance.

Another way is to take a fresh angle with a laser-like focus on your particular niche instead of doing what everyone else is doing.

There are many ways to outdo your competition, even if you’re in a tough market with large companies. To learn more about how to beat your competitors, take a look at Becky Sheetz-Runkle’s “The Art of War for Small Business: Defeat the Competition and Dominate the Market With the Masterful Strategies of Sun Tzu.”

You can also check out this list of books about out-competing others in your market.

6. A Lack Of Market for Your Product or Service

market

Before you start taking steps to launch your business, ask yourself: do people need this product or service?

Everyone wants to have as little competition as possible, and so you might feel a strong urge to “corner your market” before anyone else. This trap is a common reason for why small businesses fail.

One of the biggest pitfalls you’ll find is developing a solution to a problem few have. The last thing you want is to base your business on an idea for which there is no demand.

For instance, if you’re trying to sell a high-end home coffee maker to people who prefer tea, you probably won’t do very well because your chosen market wants tea, not coffee.

Where should you go? To a coffee market where people are looking for high-end, home coffee makers.

You’ll have competition there, yes. Keep in mind that you’ll have a nearly impossible time creating a market for your product as a small business. To learn how to determine where your market is, read “Where to Play: 3 Steps For Discovering Your Most Valuable Market,” by Marc Gruber and Sharon Tal.

7. Cash Flow Problems

cash flow

Every business runs into cash flow problems, and you will, too. The problem has nothing to do with your business’s size and everything to do with your business’s ebb and flow.

It probably seems easier to manage your cash flow when business is booming, your customers’ payments are current, and you’re caught up on your payments, too.

But it’s harder than you might think to manage your cash flow regardless of how well you’re doing. It’s easy to let your customers’ payments slide a little, and it’s easy to spend too much money. You’ll then discover you have too little cash and too much expense.

Cash flow problems can lead to problems paying your employees. If you’ve ever worked for a company where your paycheck was late or bounced, you already know how that makes workers feel. They distrust you, get angry, and if you can’t resolve your problems, they’ll leave.

This, too, can lead to a downward spiral from which you can’t escape with anything resembling ease. That spiral is a major reason why small businesses fail.

To learn more about cash flow problems and how to solve them, check out “Small Business Cash Flow: Strategies for Making Your Business a Financial Success,” by small business consultant Denise O’Berry.

8. Problems with Financing and Debt

financing and debt

You might have an excellent idea for a business, and you might even have a great business plan. But one thing you might not have is enough money to get started.

It’s not uncommon to need a loan to start a business. You can find yourself bogged down with repayment if you’re having problems with cash flow.

Too much debt is yet another reason why small businesses fail. One of the biggest mistakes you can make is to continue to pile the debt on to keep paying your bills. You’ll find yourself in a situation where you’re using one line of credit to pay off another.

Alternative forms of financing are available in today’s world, including portfolio loans, crowdfunding, and 401(k) business loans. 401(k) business loans allow you to take out a loan against your existing 401(k) without tax penalties or taxable distributions.

A full 22 percent of business owners financed their startups with 401(k) financing in 2017, and these loans are fast becoming a popular way to finance a new business venture.

Yet, these are not the only options you have for creative business funding. Steven Strauss’s “Get Your Business Funded: Creative Methods for Getting the Money You Need” has a whole list of innovative funding methods that might work well for you.

9. Inventory Problems

Inventory

If your business sells products, you have inventory, and you have to manage it. Inventory problems can cause your business to fail. Your profit comes from your inventory, and if you can’t manage it, you can’t succeed with your business.

Inventory problems lead to delayed shipments, lack of ability to plan, and loss of cost-effectiveness.

Besides that, your inventory may go stale at some point. Whether you have out-of-date parts, food beyond its end date, or other bad inventory, you’ll destroy your customer satisfaction.

You may also find that you’re spending too much money on too much inventory, and you end up tossing a lot of it out because you can’t sell it quickly enough.

Solutions like automated inventory systems and inventory consultants can help you efficiently manage your inventory.

However, you should know that managing your inventory involves much more than counting what you have on hand. Depending on your business, you may want to do it yourself, or you may want to take another route.

If you want to learn how to manage your inventory efficiently and effectively, take a look at Max Muller’s “Essentials of Inventory Management.”

10. Poor Leadership

leadership

You’ll find few people who have never had a bad boss. Whether they yelled, couldn’t do their job, never gave feedback, played favorites, or had other problems, they were terrible leaders.

A good leader motivates, knows their business inside and out, has a solid vision, communicates with their customers and employees on various issues, and much, much more.

A good leader also doesn’t try to do everything themselves. They know how to delegate, which gives their employees plenty to do while still keeping them from becoming overwhelmed.

If you’re a weak leader, your employees won’t stick around, you’ll have unhappy customers, and eventually, your business will go under.

Not everyone is a natural-born leader, so for help in becoming the leader your business needs, check out Tom Gegax’s “The Big Book of Small Business: You Don’t Have to Run Your Business by the Seat of Your Pants.”

You can also check out this list of books on leadership if you need to learn more.

Final Thoughts

Launching and running a small business is hard and comes with a lot of pitfalls. Even if you’re a seasoned small business owner, you know that. Perhaps you’ve even hit one or two, or more, in previous business pursuits.

If you know the most common reasons why small businesses fail, you can learn ways to avoid them. You won’t have a business that runs perfectly and can’t ever fail. But you’ll be in a position where your business will have a fair chance.