Top 5 Reasons Why Small Businesses Fail

By Shaila Rao on Feb 17 under Management

Starting a small business is way to living your American Dream. But the market place is often unforgiving. Research shows that less than 5 out of 10 small businesses survive beyond first 5 years. Any budding entrepreneur planning to invest his time and savings into a new venture would not want to be a part of this sobering statistic.

Though there are very little authentic research available, Dun & Bradstreet did come up with a oft quoted research report more than a decade ago which said 88.7% of businesses fail due to management mistakes. Well, that doesn’t really help.

Read on to find out our take on the pitfalls of small businesses due to management mistakes and how to avoid them.

1. No Viable Market

You have this great idea for service or product which you think will change the industry, but have you stopped to think if there are customers willing to pay for it? Build it and they will come school of thought has only let to demise of many small business owners.

Answer this question before plunge into any new business – Why should a customer buy from you and not from a corporate giant or others who have been the business for years? Is it because you offer much needed personalized service or customized solutions or even shorter turnaround time or after sales service. What is it?

Check out this podcast by Steve Blank, a professor in Stanford. He mentions that about 90% of the start ups die because they can’t find the market. So he says, go find out if there’s someone who wants your product or service. Do know what your value proposition is?

As Peter McLean writes in his article Small Business Plan – What is your Value Proposition? – Value proposition is only discovered through depth of thought and rigorous analysis of the market place, competition and existing practices. It involves listening to what the customers are saying and understanding their needs.

Make sure your business offers something that customers would value.

2. Poor Capital Structure and Cash Flow Crunch

It is fairly common for business owners to take up too much debt or underestimate capital required to reach cash flow breakeven, causing many promising ventures to shut down prematurely. You need to be conservative with your financial projections and be sure to have adequate funds (or personal savings) to cover all the sunk costs, till your business becomes cash flow positive. Small business cash flow crisis –Pyschology and not economics is to blame, by Chaitanya Sagar, CEO of www.p2w2.com, tells you how to stay out of cash crunch.

3. Lack of Marketing Expertise

Your customers won’t buy from you if they don’t know you are around. You need to market yourself. And do not make the mistake of treating marketing as an unnecessary expense!

Find effective ways to market yourself through advertising, direct marketing, trade shows and exhibitions. Set up your website and market yourself through internet media such as blogs, forums, email groups and even search engine marketing.

The results are never instant and you need to find the optimum mix that works for your industry. Hire a consultant if you do not have the expertise.

4. Poor Management

Poor management ranks high on what not to do list of business owner. If you lack current and relevant in formation in finance, purchase, selling, production, hiring and managing employees, get help!

When you reach a critical level (about 1 million to 5 million dollars), be sure to put proper management structure in place that will make the work flow

and information flow optimal without your business loosing its dynamism. Also this is the time when you hire suitable managers.

5. Out of touch with customers

Most small businesses are able to have a personal relationship with customers. This is one advantage that huge corporations do not have. You need to focus on good quality products and services and aim on high customer satisfaction levels.

Use customer feedback as free business advice! Ask you customers for feedback and suggestions, evaluate them and incorporate into your business. This mechanism would help you gauge changes in customer tastes, preferences, price sensitivity. Also they are the best source of information of your competitor activities.

Life as a small business owner can be exciting and rewarding, if everything goes as per the plan. You have the advantage of being forewarned about the pitfalls of being in a small business. So go for it!

About the Author: Shaila Rao is a guest contributor at p2w2.com which helps small businesses outsource services like writing, software, graphic design, virtual assistance, business consulting and research. Shaila blogs at p2w2 blog (RSS).

Picture credits: yanec, danesparza

Tags: business failure, cashflow, Management, market

Comments (24) | Trackbacks (3)

27 Comments

By Vivek Krishna, February 18, 2009 @ 4:01 pm

would be great if you can make a post on tax related stuff,implications of incorporation as company,proprietership,partnership etc in India.
By Chaitanya, February 18, 2009 @ 4:12 pm

Thanks for the suggestion Vivek. Will try my best to cover the topic.
By Peeyush Agarwal, February 19, 2009 @ 10:26 am

This is one of the best articles I’ve read in a long time. Can you also cover the importance of cash flow over profit for start-ups.
By Chaitanya Sagar, February 19, 2009 @ 12:12 pm

Sure. Will do. There’s one on cash flow here: http://www.p2w2.com/blog/index.php/small-business-cash-flow-crisis-psychology-not-economics-is-to-blame/
By Guru, February 19, 2009 @ 3:28 pm

Nice article. Expecting some more stuff.

Best Wishes
Guru
By Nicky Jameson, February 22, 2009 @ 6:39 am

One of the most basic reasons businesses fail is that they don’t have a business plan, or they feel that having a business plan is only necessary if they are looking to finance. Incidentally, if you do a business plan you need to cover every single one of the topics you mention above, from Market research, which tells you if your product has a market, to the nature of the management team, to the expected cashflow and what-if scenarios. Once the plan is done, the business then has to review it frequently.
By Chaitanya, February 23, 2009 @ 12:58 pm

Nicky, I don’t agree with you. Having a plan and reviewing that frequently is a b-school/MBA way of looking at things. Talk to entrepreneurs (even successful ones), many have never written a business plan. But that does not mean there are no plans. It’s a bit unstructured that’s all.

Thanks for dropping by and for writing down your thoughts. Please feel free to disagree.
By Kare Anderson, February 26, 2009 @ 4:02 am

More specifically re #1, what is the differentiating benefit that would cause customers to buy from you rather than a competitor.

Another key point: What other reputable businesses also service your kind of client and how can you reduce your per-client acquisition costs by forging a partnership with one or more of them?
By Chaitanya, February 26, 2009 @ 11:12 am

Kare, insight generating questions! Thanks! Keep coming back.
By Nicky Jameson, March 14, 2009 @ 7:34 am

@Chaitanya. Fine. But I disagree with you right back. If you have no plan, you have no idea where you are going, how you are going to get there or with whom. Not to mention how much money you need, how much you need to make to be viable.

The saying that if you fail to plan you plan to fail is very true. There are very few businesses that succeed with out a plan… good ideas are a dime a dozen, planlessness is one of the prime reasons many businesses fail – they get distracted, have no idea of where they are heading… rather like a ship without a rudder It has little to do with an MBA – or lack thereof. Even if a plan is two sides of a sheet of paper, you still need a plan. It can be tweaked and adjusted, but it’s still a plan. Bill Gates didn’t earn his billions by happenstance. Neither did McDonalds.

And any business needing venture or any kind of capital investment (most businesses),even a grant who thinks they’ll get any attention without a plan is dreaming. I talk to entreprenuers quite a bit. Those who have plans tend to be more focused. Those who don’t can’t answer the critical questions that will ensure they are successful. It isn’t that it’s not possible to launch a business without a plan. In fact I did just that. But only initially. And I didn’t need to ask for money either. Lastly – reviews are necessary because circumstances change. If you are off plan it’s an opportunity to see why and adjust.
By Chaitanya, March 18, 2009 @ 11:32 am

Thanks for the comments Nicky. I understand where you are coming from. I agree that every business has to have a plan though it need not be formal and documented. Keep coming back!
By Nintendo DS Accessories, April 10, 2009 @ 12:08 am

Nice, As I have been actively using p2w2.com, I can trust freelancers from p2w2. They all are qualified and great skilled professional!
By Tiffany Bracelets, October 7, 2009 @ 2:53 pm

This is one of the best articles I’ve read in a long time. Can you also cover the importance of cash flow over profit for start-ups.
By Clara James, October 12, 2009 @ 8:00 pm

Nice Post! In other words these five points can be illustrate as . . .

No clear objectives
Unrealistic expectations and resource allocation
Not sourcing content for the long term
No feedback mechanisms
Do it yourself syndrome
By IT Stuff, February 17, 2010 @ 10:22 pm

Small business, are not ment to resist,in front of big business, this is one problem. Second would be no goodwill is formed, and the business makes the badwill. The competition is better than you one reason. And making a list you realise that you better don’t start any business and stay home. Good work with the article!
By Chaitanya sagar, February 20, 2010 @ 2:00 am

Good comment IT Stuff! Lack of resources makes it challenging but the ride is worthwhile.
By Yojee, March 1, 2010 @ 2:53 pm

Interesting I have to say as a small business owner, I’m guilty of reasons 2 and 4. I kept going in circles, and things were really tight, hemorrhaging financially.
However from losses in the first three years we managed to break even in Year 4 after being advised by ALL the bakers and FINANCIAL SPECIALISTS that I was just digging a hole. Yr 5 we started making profits, all seems like yesterday.

Anyways in retrospect, I’m so becoming convinced that A LOT has to do with the WILL & DETERMINATION to see the business work. If I’d taken that ‘intelligent’ advice I’d probably look at this article from a technical point and say yes 1 and 4 and 10 got me.

Business plan, hmmm its necessary but if this is not coming from within you, I think its only a matter of time.

My personal view is people simply give up to soon, to easy and yes those reasons too
By azuljar, September 1, 2010 @ 2:48 am

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By Jim DeLapa, October 10, 2010 @ 5:09 am

Excellent article. It’s tragic to see a new business owner plow into a new venture “willing to take the risk” but unwilling to do the proper planning to mitigate the risks. Your article is a service to those people who study hard before they take the plunge. Take heed would-be entrepreneurs–factor these things into your small business plan.
By Eyal, April 18, 2011 @ 3:27 pm

A business plan is important in order to see if the idea is real profitable.
By ייעוץ עסקי, April 18, 2011 @ 3:28 pm

ייעוץ עסקי
By Judy Q, March 15, 2012 @ 4:29 am

I am so afraid I am heading for failure and finding myself searching for advice.
I have been in this type of business most of my life, antiques, New and Used goods. I have worked for others in management, making the numbers good. I know having a great staff is important. But since I have gone out on my own, I cannot afford to do any hiring. I opened in July 2011. My daughter-in-law was supposed to do this with me. I know it takes at least 2 to make it work. But she bailed within 2 weeks after we opened, she found it was work and changed her mind. No big deal better to find out quick in that case. So I am running solo.
My over head is small compared to many, my location is a very busy highway, there is a big lake is close by and only 10 miles from a large town with many of the same type of shops, just larger. I am on the edge of a small town and speeds are 25mph. I have good regular customers from here and near by towns, just not enough. I have support from many of the locals with nice donations, which I offer a 20% discount since I am for profit some use it while other refuse the card.
My pricing is much less than others, but some of the customers still frown (in all my years of doing this there will be some wanting it for nothing) but my pricing is fair and still leaves room for some else to make a little also. I have enough quality stock for a few more months, which I try to swap out as such as I can, because I am so small. I am the only one of my type in town, sometimes I think my building may be too small around 300sq ft, but it is closer to obtain the over head, but not through store sells alone which only a little more than half. This winter was hard and I knew it would be. I am putting in most of my own money to keep it going, which I am aware I will have to do this until it is established better. It is a good thing I love what I am doing, because it is becoming more of a hobby than a business.
I have limited space for my product and have thought about getting a larger building in a bigger town where more business like mine are, but over head would be larger, sales maybe better, but I feel I maybe in the same place I am now just larger numbers. My products are more want-full things and having smaller needful things. I feel this is holding some of my sales back with the way of the economy having appliances, furniture and clothing may be a need but have no room for the big stuff. I sell both of what I have just not enough of either.
I have web sites, not making any sales on them either I get enough hits just no sells. I think my design is okay, maybe it could be better. I am not a secure site and that may have a lot to do with it, not sure. But I use PayPal and they are.
I sell some of my best stuff on the biggest auctions sites, but hate the new fees. Sometimes it makes the sells not worth listing on it either, but I do use it to help cover when needed.
I practice consistency, I have picked the days that the highway is the busiest for opening and even tried to open on the dead days, they are dead. I am open 5 days and have stayed open late to see if it makes a difference, doesn’t really. I log my sales hoping to see a pattern so I may be able to close on some days in order to go buying at auctions and garage sales, but they are not consistent. I have only made my week a few times since I opened, never made my month come close a couple of times right after I opened, but not without selling on the auction site.

Money is tight and I have gone on word of mouth alone. I have been saving all my quarters in my pockets to pay for an ad which I finally made it, so I placed an ad in the local free paper that comes out once a week it cost more then I saved but covers the county all week verses one day by subscription in the Herald. I spent extra for that paper and hired temp help to stock up to be ready for the new customers I was hoping to draw in… I haven’t had but one new customer come in that told me they seen my ad and bought a .69 item. Not paying for the expense, by no means. I was dead that whole week, first time ever, I have had slow weeks but never dead. My fear is that I spent out so much for this ad and help, that nothing will bringing it back in. Since cash is tight, this is the first time it has made me stop to question what will happen the rest of the month. It was almost like my ad said, “Don’t shop here…” I feel I jinxed myself by spending so much making it hard to pay the bills coming up due or LIGHTS OUT!
I have always made enough for the smaller ones through the store alone in the first half of the month it is the larger ones that have been the toughest to come up with. I am afraid that if I cannot figure out what I am doing wrong next month maybe my last, because it will take all of my savings to cover this month.
I am sitting on ½ ac which I am looking for a few weekend vendors to set up a spot to do their trading, hoping to make my sales better also not to mention helping with the over head. Parking is not a problem for me and if more is needed at some point I can see about using the high school parking which is right across the road.
I am not a quitter and not afraid of hard work, which it can be very demanding since it is just me, this does not scare me either, it can wear me out wearing so many hats and come my days closed they can be welcomed, but I cannot hold out if sales are zero the coming month. In my past experiences March can be some what slow not sure why maybe coming out of winter and customers have spring fever, who wants to be inside when it is finally nice out. I have noticed most of my customers are fair weather people, if it was nasty out I would be dead for those days, this is what made my winter hard.
I can still sell on the auction site making my bills easier to cover, but why would I need a shop to do this? I have nice clean place, it is cute and well organized. I have about every inch of it covered it is not over packed but well stocked. It maybe small but it can hold more than it looks like it would. I really don’t want to think about closing the doors, but feel I may have no choice.
This past week has shaken me and I now feel frighten forcing me to look for my next move and think about the What IF…
Can some one please tell me what I am doing wrong?
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