According to the U.S. Bureau of Labor Statistics, approximately 20 percent of small businesses fail within the first year of operations and about 50 percent fail within the first five years. This can be attributed to a wide variety of factors. But as a small business owner, it is important to understand the main reasons why most businesses fail within the first five years in order to prevent that from happening to your business. Below are some of the common reasons why businesses fail along with tips on how to avoid these setbacks and ensure your business continues to succeed for years to come.
Lack of demand
Many business owners first start out with an idea that their product or service offering will be needed or used by many. However, that is unfortunately not always the case. So prior to starting your business, it is imperative that you either have an established customer base that you know will support your business prior to opening; or do research on if there is a market for your product/service offerings and understand what the needs are of your target audience. Once you understand that, you can tweak your business concept to ensure there is a desire for your product/service and that you are best meeting your clients’ needs/demands.
Also, customer demands and expectations are always evolving so regardless of your numbers, or even feelings that your business is doing great, keeping your business fresh and customers satisfied is always a key indicator of successful business. Of course, you shouldn’t be bending the knee for every run of the mill complaint, but tracking feedback can help ensure you’re staying adaptive and keeping your business model, products, and marketing ahead of your industry curve.
Ineffective leadership
As a small business owner, you are the face of the company, so it is on you to set the vision for the business, communicate your goals, establish a culture and keep your employees motivated (among other aspects). Often times businesses fail due to a lack of leadership, unmotivated employees or employees having uncertainties about where the company is going. So to combat that, it is important to develop your leadership skills, be clear about what your vision for the company is and execute the vision, establish a strong culture and positive work environment, while showing your appreciation for your employees’ efforts so they feel motivated to work hard for you.
While it may be one of the more obvious factors, the way high quality leaders all share a cohesive vision can shape your business is virtually impossible to understate. Very seldom does everything rely on one person to lead all aspects of a business, which is why it is so important for everyone in a leadership role to share the same vision for how the company currently stands, as well as the future and direction of the company that they should be guiding it in. Power dynamics can be a tricky thing to manage when running a business as it is very common for there to be friction if your business is hiring ambitious people. This is something to always keep an eye on, but regardless of any issues that may exist among leaders, directing everyone in the same direction with the same end goal can keep up your productivity.
Poor cash flow management
Cash is the lifeblood of all businesses and a leading cause of business failure is poor cash management, as many small business owners only know their craft and do not understand how to manage their business’ cash flow/finances. This is why it is recommended for business owners to implement a cash flow forecasting tool and to regularly monitor the business’ finances to make sure there is enough money to cover expenses/costs. It is also highly recommended to utilize the efforts of an advisor or specialist to help manage the company’s finances if needed.
Financial forecasting is one of the tools that can be evaluated for your financial situation and planning. While it’s always important to look over your current financials, it is debatably equally important, if not more, to forecast the future finances of your company. There are many existing and accessible templates available to use (or you can also build your own) that is likely to be more specific for your situation depending on who is managing your company’s finances.
Lack of marketing
Most business owners understand that marketing/advertising is an important aspect of running a company, as marketing efforts help get your name out there in order to captivate new business, generate revenue, and ideally, can help grow your business. A business that does not utilize marketing efforts most likely relies on its existing clients to keep coming back (and possibly getting business through client referrals). But if that does not happen, or if they lose a major customer or two, the business may be in jeopardy of declining or even closing down. So to ensure that does not happen, it is important to develop and implement proven marketing strategies such as utilizing a website, social media pages, launching an email campaign, billboard/tv or radio advertisements, or consider working with an agency to ensure strategies are implemented that are most effective for your business in order to not only to maintain existing clients but to generate new sales as well.
Inability to adapt to changes
Another harmful aspect to small businesses is an ownership team being unwilling or unable to change. A business owner that is not willing to change how they operate (because “we have done it this way forever”), refuse to utilize the latest technology (which is now being used by most competitors in the industry and it is clear that customers are now choosing the competitor instead of them), or not modifying its operations to offer new products or lower pricing when a new competitor arises, can all be detrimental to a business. That is why business owners need to be aware of the latest industry trends, be willing and able to utilize new technology, and more so, be willing to change their behaviors, while being receptive to client feedback.
Burnout
Any business owner knows that running a company takes an extraordinary amount of effort and it is very easy to become overworked and burned out. If that happens, the business owner may also lose motivation, become less productive and not have a desire to achieve company goals, which in some extreme cases, could cause the company to decline or even close. This is why it is important to prioritize taking care of yourself as a business owner, take vacations or breaks to recharge, and delegate tasks to your team/outsource as needed.
Lack of funds available
A number of small businesses also fail due to not having sufficient cash in their bank account. This can be detrimental in the event an unforeseen circumstance or expense arises. In order to combat that, consider securing financing through alternative lending sources such as Penhurst Capital. Penhurst specializes in helping small businesses secure the financing solutions they need in order to ensure the business continues to thrive.
