Top 5 Reasons Why Small Businesses Fail

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.
Top 5 Reasons Why Small Businesses Fail
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, 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!

Top 5 Reasons Why Small Businesses Fail

About the Author: Shaila Rao is a guest contributor at 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

Spend or withhold? When should you spend? And how much?

Spend or withhold? When should you spend? And how much?

I will raise more questions than answer in this post.

Spending extravagantly is not good for a small business. That is clear in my mind. I have seen more businesses that spent liberally struggle, fail and die than ones that have controlled their costs. This is true even if you have venture funding. The funding will only last some months unless you can earn revenue commensurate to the expense.

Spending is easy. Earning revenue is difficult. And it takes much much longer than we anticipate. The reason why we have to stay tight with the cash is that we don’t know how long we have to wait to earn revenue. And

waiting costs money – to keep the business relationships alive; to pay salaries, rent, utilities bills etc.

The case for thrift is the easier one. The more difficult question is when should you loosen your purse strings and by how much? There is no one answer to this question. Each of us small business persons has to decide on our own based on the circumstances we face.

However, there are a few aspects that are currently helping me:

1. Know the right time to spend; experiment in small amounts and confirm that it works before spending large sums

2. Keep a reserve – enough to survive about 6 months. The reserve is untouchable; you can only spend the reserve if you have gone out of all other options

I am not among those who believe that they can leverage (take a large loan) and take big risk spending it. If you do that, your business becomes a hit or a miss. It is a decision you have to make if you want to do that.

What are your thoughts on this topic? How have you benefited or lost because you have chosen to spend? How did you make those decisions?

Spend or withhold? When should you spend? And how much?

About the author: Chaitanya Sagar is an expert in small businesses and is the CEO of, an online marketplace for services like writing, business consulting, research, software, online-tutoring etc. You can find good service providers and collaborate with them on p2w2.

Picture credits: Night Star Romanus iChaz

Measure to Manage Performance in a Small Business

I think I am doing everything right, yet I am not successful…I wonder why?Measure to manage performance in a small business.
If you have been bogged down by that query, you are not alone.

In the early 1900’s, Frank Bettger became the leading salesperson for the Fidelity Mutual Life Insurance Company. One of the ways Frank improved his performance was by measuring the results of his sales calls.
He discovered that 70% of his sales were closed on the first interview; while 7% got closed after the second interview. But do you know the most important discovery? He was spending nearly 70% of his time on calls after the second interview! That means he could cut down his tele-caller cost by 70% and still achieve same results! That resulted in enhancing the value of his calls by…. 725%! (from $2.30 to $19.00!) (Note the clear metrics he used to quantify his output).

Most business owners, including me, get so caught up in the flow, they don’t bother to track where they are going. Tell me how many times in the last few years have you stopped to analyze what is each customer  worth to you in real monetary terms?
You’d be surprised at the discovery. At the end of this exercise you may learn that often the client you cherished as your best customer is, certainly not the best, but often, that customer turns out to be the worst. Measure it for yourself and check it out.

If you don’t have systems in place to identify the bad from others, you can’t understand who is good for your business and who is not. Similarly, if you have good traffic at your site, you must know what site features you can attribute this to, in order for you to build up on those strengths later and multiply your success quotient.

What you can measure you can manage

A machine shop started measuring waste by weighing a trailer where scrap was stored and relaying those figures to the team members. The scrap expense went down by $30,000.  Later, when the owner decided to stop weighing the scrap, the scrap expense once again increased by $30,000!
If you don’t measure it, you can’t manage it. Get it?

Going beyond the bottomline

In my opinion, it’s a mistake to measure your success only in pure financial terms.  There can be certain aspects of your business such as customer loyalty, intellectual capital, employee skills and reputation that also have real worth and value. Measuring these non-financials is also critical as they help you market your services more effectively to your customers.

In their book Measure Up (Disclosure: This is an affiliate link)), Richard Lynch and Kelvin Cross suggest that following measures of success: quality, delivery, cycle time, and waste. By measuring activities in these areas, an entrepreneur can think of alternative approaches to bringing more value to his customers.

Data is apolitical

If you have data to take decisions, then you can be less political because data is apolitical. Your employees will love your company for that!

In short, it’s important to measure success for the following reasons:
• To facilitate corrective actions if there are any performance gaps
• To support strategic decisions and goal setting
• To track your progress towards those goals; and
• To improve accountability

Measure important metrics

I am not here to say that you should measure everything, unless you are a large company. Measure the most important metrics – revenue per month, gross and net profit per month, number of customers, repeat business, number of visitors on your website etc. that are really important to your business. What are the top 10 metrics you should be measuring for your company?

About the author: Chaitanya Sagar is an expert in small businesses and is the CEO of,

an online marketplace for services like writing, business consulting, research, software, online-tutoring etc. You can find good service providers and collaborate with them on p2w2. Picture credits:  HBuzacott & Guillermо

Measure to manage performance in a small business.