Top 8 Reasons Why Small Businesses Fail

Updated: March 18, 2021

The US Small Business Administration defines a small business as a privately owned and operated business with 100 employees or less. This 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 fails along with some tips on how to prevent it from happening.

1. Under-capitalization

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

2. A bad business location

Did you discover 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.

3. 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.

4. 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.

5. 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.

6. 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

7. Ignoring competition

Other businesses are out there to get your customers. So always be aware of 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.

8. 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.

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  1. 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. 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.

  3. May I also add not understanding the market enough. I’ve seen so many franchises, food carts, especially that close within a year because they thought it’s what the buyers need.

  4. I can certainly relate to some of these business failures. An early business I had started to grow to a point that I could really use some additional labour. I had not been out of high school for too long. During interviews, I soon learned that prospective employees (many were recent H/S grads) wanted to start work with me at more money than I made running the business. Almost none wanted to purchase any hand tools of their own. My explanation that you will have this tool for the rest of your life did not matter. In the end, my niche was to only take on smaller jobs that I could complete myself, and on occasion I would trade labour with a friend who was in the same position as I, unable to find qualified people at a fair beginning wage. These days, with my Wife’s new business here in the Philippines. the only limit to growth is capital. After two years and counting, demand has actually become one of those great problems. We can no longer inject P10K, P20K or P30K for a sudden need. Our last busy season created a need for P500,000. That amount of money simply does not grow on trees and I can no longer simply take it out from my trading accounts. Borrowing from a bank is out of the question for now as I am in a group discriminated against for a mortgage. Senior citizens can not obtain even a small mortuguage here in the Philippines even against a fully paid for home. We have to limit all growth to reinvestment of profits for one more year. Then, if business demand continues as it has, our business will be past the three year mark and will be able to borrow for growth. It is a good problem to have but a little frustrating that our finely tuned business is lumped in with others that easily fail.

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