Top 8 Reasons Why Small Businesses Fail

Posted by Fitz Villafuerte under Business on March 15, 2010

The US Small Business Administration defines a small business as a privately owned and operated business with 100 employees or less.

That definition would put all enterprises of entrepreneurs who I personally know under the category of a small business.

And that is a bit discomforting because according to US statistical data on small businesses – 50% of small businesses close down within five years.

A study shows that out of 10 small businesses that start today:

  • 3 of them would fail within the next two years and;
  • 2 more would follow on or before the fifth year.

So what causes these businesses to fail? More importantly, as an entrepreneur, what can you do to prevent that from happening to your own business?

Here are what I consider the top eight reasons why a small business fail along with some tips on how to prevent it from happening.

Never start a business without enough capital – which means having enough funds to survive at least a few months without profit. Here’s a guide to know how much business startup capital you’ll need.

A bad business location
You discovered a cheap commercial space for your business? Before you pay that deposit, do your research first and see if it’s really as good as it looks. Here are eight tips to finding the right business location.

Ineffective marketing campaigns
Failure to get new customers stagnates your income. And the only way to get a steady stream of new clients is to have a continuous and well-thought of marketing plan. Design and implement cost-effective, creative and consistent promotions. Here’s how to plan a marketing campaign in 10 simple steps.

Poor accounting and financial management
Prevent the excessive acquisition of fixed assets. Control your debts and the credit you extend to customers. And always have reserve funds to cover unexpected and uncontrollable expenses such as raw material price hikes, increased utility costs and natural disasters. Moreover, I believe that all business owners should have basic accounting skills.

Employee incompetence
Learn how to hire the best people. Clearly define their responsibilities and set work standards they must meet. More importantly, find ways to motivate and inspire them to work for the good of the company. Inculcate in them the mission, vision and values of your business.

Failure to adapt to the changing times
“A business is a dynamic entity. It will not achieve long-term success if it does not learn how to adapt to the ever changing market… to be ahead or up to date with the latest business trends.” – a quote from How To Catch Emerging Business Trends

Ignoring competition
Other businesses are out there to get your customers. So always be aware what they’re up to. Furthermore, always strive to deliver great customer service. Here are more tips on how to keep your business ahead of the competition.

Growing too quickly
Always set realistic goals for your business and do not overextend yourself financially. Expand your business slowly but surely. Here are some business development strategies you can try.

What about you? What do you think are other reasons why businesses fail? Do share them below in the comments section.

Learn more about business and entrepreneurship by subscribing to Ready To Be Rich.

Wikipedia, the Free Encyclopedia. “Small Business“. March 2010.
Focus. “Small Businesses and Hard Facts”. January 2010.

Photo credit: Tommy Ironic and maistora



Tags: , ,

5 Responses to “Top 8 Reasons Why Small Businesses Fail”

  1. Ads for Free says:

    The discipline. Entrepreneurs should have good discipline on how they managed their business and the money that they are earning from the business. Some kasi became careless and spend too much pag-dumating na yung pera.

  2. […] the main reason for failure in business undertakings lies within the business strategy itself. Business blogger Fitz Villafuerte writes a few of the most common internal reasons of why businesses […]

  3. Philippines Business Consulting says:

    A good statistic to keep in mind is that 90% of small businesses fail. A mistake many small business holders make is not knowing when to quit. If you see your small business really failing it may be time to cut you losses, instead of delaying the inevitable.

  4. […] fail because of many reasons – under-capitalization, poor marketing strategies and mismanagement are just some of the […]

  5. […] Top 8 Reasons Why Small Businesses Fail […]

Leave a Comment and Join the Discussion