Why small businesses fail

By Ian Armitage | Wed Aug 25, 2010|

In life, the last thing you want to focus on is failure. And the same is true of business. The last thing you want to do as a business owner is to look at the negatives. However, if you address the common reasons for failure up front, you’ll be much less likely to fall victim to them yourself. Here are the top reasons why businesses fail.

Poor Management
Poor management has to be the number one reason for failure. New business owners – specifically those that do fail – often lack relevant business and management expertise in key areas like finance, purchasing, selling, production, and hiring and managing employees. Unless they recognize what they don’t do well, seek help, and relinquish some control, business owners face disaster.

Creating the right environment
Leaders make the future and a successful small business always has a good, strong leader who creates a work climate that encourages good performance. He or she has a skill at hiring competent people, training them and is able to delegate. A good leader is able to make a vision a reality.

Insufficient Capital
You wouldn’t go into a shop to buy something without money, so why start a business without sufficient funds? This is a big mistake many failed businesses make. You need capital. Business owners often underestimate how much money is needed. They must also have a realistic expectation of incoming revenues from sales. It is imperative to ascertain how much money your business will require. AND BE REALISTIC.

Lack of Planning
These all seem rather obvious, but it is the obvious things people take for granted. Common sense, it seems, isn’t so common any more. A business plan is one of those common sense things. Everybody knows it is absolutely essential to have a business plan. But so many small businesses fail because of fundamental shortcomings in their planning. The old saying is “fail to prepare, prepare to fail”.

Lack of a niche target market
One of the most common problems with small business owners is that they sell to anyone. If you take time to develop a well-defined niche for your business, you will ultimately make more money in the long run.

Failure to create a Unique Selling Proposition (USP)
This one is simple. Why should your customers buy from you and not your competition? What do you have to offer them? It is your USP that will attract business.

Overexpansion
Overexpansion can also lead to business failure. But it is important too not to restrict the growth of your business. You need balance. The problem is that business owners confuse “success” with how fast they can expand their business. It often ends in disaster.

No market
Marketing will make or break your business. You have to continually promote your business to let people know you exist. You can’t expect customers to find you by chance.

You started your business for the wrong reasons
Finally, if the sole reason for starting your business was to make lots of money, then you probably started off on the wrong foot. Yes, we all want to make money, but that can’t be the sole motivation for starting up in business.

Edited by Ellie Duncan