Small businesses fail at an alarmingly high rate. Here’s how to mitigate the risks that all new ventures face.
Starting a small business takes patience, perseverance, and a lot of hard work. Launching a new venture is difficult: Data from the U.S. Bureau of Labor Statistics shows that nearly half of all startups fail within the first five years.
There are some common reasons why small businesses fail. Understanding the obstacles that other business owners have faced can help you navigate these specific challenges. Below are the top reasons why small businesses go under and tips on how you can avoid the same fate.
Challenge No. 1: Cash flow problems
Cash flow is a blanket term that has many underlying roots. Cash flow is a metric that indicates how money is coming in and being spent at your business. Cash flow issues can result from a lack of funding, poor budgeting, or inventory management issues, among other things.
There are a few ways to mitigate this risk, although it’s worth reiterating that negative cash flow often indicates a different issue. First, avoid big expenses in your first year of business.
“As your business launches and grows, there will be a push and pull between funding and supporting that growth, and being conservative with your spending,” wrote SCORE. “When in doubt, stay conservative. The ‘lean and mean’ startup headset — and the concept of a minimum viable budget — is your friend.”
A lean operating budget is a good starting point, but it isn’t the only way to manage your cash flow. Spend time tracking your inventory, building cash reserves, and making sure your accounting is running smoothly. Many experts recommend working with a certified public accountant during the first few years after your business has launched to ensure your accounts receivable/accounts payable systems are working well and that you have enough set aside for taxes.
The other side of cash flow is revenue, or financing, for new businesses. Many small business owners struggle to find loans, grants, or investors to fund their ventures. Look for unique funding opportunities for small businesses, such as government loans, business diversity grants, or industry-specific grants.
Challenge No. 2: There’s no demand for your product or service
Nearly 35% of small businesses fail because there’s an insufficient need for their product or service. When there’s no demand for what you’re selling, the best marketing campaign in the world won’t turn around your business.
Avoid this risk by doing the right market research before launch. This exercise should form a key part of your business plan. The National Federation of Independent Business reports that companies with a business plan have the best chance of success — particularly if they identify their potential markets, define their ideal customer, and analyze their competition.
A business plan is a document that outlines important information regarding operations, goals, and finances, serving as a guide for measuring progress and making necessary adjustments. Your plan should be well developed long before your products and services are available to customers. Failing to do so can leave your business unprepared to navigate market challenges.
When writing a business plan, include the following:
- An executive summary of your business and a clear company description
- Information regarding your company’s organization and management structure
- The products and/or services you will offer
- Your marketing and sales strategies
- Financial projections for your business, as well as any funding requests
- An appendix with necessary sources and additional information
When crafting your business plan, highlight how you will attract and retain your customer base and what makes your company unique. Many good, affordable resources can help you estimate the demand for your product or service. Try Google Trends, a free tool that can show you how often people are searching for keywords related to your product or service. Surveys and focus groups can also help you get feedback on a minimum viable product during your development process.
Challenge No. 3: Poor management
As the creator and founder of the business, it can be tempting to hold tight to the reins as your venture gets off the ground. Unfortunately, attempting to do everything yourself is neither sustainable nor helpful for the longevity of your business.
“The owner may have the skills necessary to create and sell a viable product or service but they often lack the attributes of a strong manager and don’t have the time to successfully oversee other employees,” wrote Investopedia. “A business owner has greater potential to mismanage certain aspects of the business without a dedicated management team whether it be finances, hiring, or marketing.”
Your budget may not allow you to hire a full senior leadership team, but look for ways to delegate key roles effectively. That might involve bringing in a fractional CFO, hiring a mid-level manager, bringing on a virtual assistant, or outsourcing key tasks to a partner.
Challenge No. 4: Financial challenges
Financial challenges are hard to avoid, and they make it difficult for your business to flourish and remain profitable. Limited funding, combined business and personal finances, and issues with budgeting or establishing prices are common financial issues a small business encounters.
Entrepreneurs should understand various funding options, such as traditional loans, personal loans, microlenders, crowdfunding, and investors. Depending on what stage your business is in, some sources of funding — including a combination of sources — may be more appropriate than others.
Once you’re funded, learn how to manage and track your finances. Having a clear understanding of where your money goes is essential for ongoing success.
Challenge No. 5: Poor employee management
A poorly managed business can lead to serious ramifications, hindering a company’s chances of success. Nearly 20% of startups fail due to team problems and other human resource-related issues.
Bad employee management is harmful to the health of the business and to the employees. It can lead to excessive turnover, stress and anxiety, reduced engagement, and overall poor bottom-line results.
Enhancing employees’ sense of autonomy, competency, achievement, and belonging are great methods to boost morale, build loyalty, and reduce turnover. Create an onboarding process that sets up new team members for success and identifies the resources they need to feel supported. Consider implementing feedback tools to improve employee engagement and foster a transparent work environment.
Management should be trained regularly to build and enhance leadership skills, including providing feedback and recognition to employees to show appreciation for their performance and efforts.
Challenge No. 6: Inadequate marketing
Marketing has become a big contributing factor as to why small businesses fail. In fact, 22% of failed businesses didn’t implement the correct marketing strategy.
Marketing and sales can be costly and ineffective if your small business has no branding, no direction, or no strategy. Lack of vision will fail to attract customers, or it can even turn them away.
Identify and understand your market segment and determine how you want to approach potential customers. Test your marketing strategy by creating relevant content and campaigns. Finally, develop a plan to measure the success of your marketing efforts — including tracking metrics like overall website traffic, email open rates, and cost per engagement — and then adjust as needed.
Challenge No. 7: Failure to adapt to market changes
Adaptability is essential to keeping up with our ever-changing cultural needs and economic climate. Because change is inevitable, business owners must avoid becoming complacent and adjust to market changes for longevity.
Some strategies to adapt to an ever-changing market include:
- Hiring creative and forward-thinking employees who understand and believe in your mission
- Creating a positive work environment and providing opportunities for growth and development
- Conducting research and paying attention to what’s hot, trending, and relevant
- Knowing your target audience, their needs, and their behaviors, as well as how they may change over time
- Staying current with technology and making sure what you are implementing benefits your brand
- Continuously assessing whether your products or services are outdated and deciding if improvements — or even an entirely new product — are needed
Challenge No. 8: Inventory mismanagement
Finally, poor inventory management drains a new business’s resources and accelerates failure rates. Many merchants start by purchasing large amounts of inventory, envisioning that they will sell it for a profit.
If those products don’t sell as quickly as planned, inventory can become obsolete or lose value. “This forces you to sell [your products] at a deep discount, or not at all,” wrote Lightspeed.
On the other hand, if you underestimate how much inventory you need and it sells out too fast, you risk losing sales. Stockouts also result in a negative customer experience, hampering your ability to build brand loyalty and keep customers returning.
Inventory management tools can help make sure your items are kept in stock for the right amount of time. Stay on top of your supply chain to make sure you have the right items on hand, and pay attention to your sales to catch any dips or peaks in demand before you make an ordering error.
Understanding basic business fundamentals and common reasons behind small business failure can help you avoid those mistakes and increase your chances of success.
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About the author – Emily is a versatile freelance copywriter who writes for brands and agencies in tech, finance, and fashion. She is currently based in Cape Town and spends her free time running around Table Mountain.
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The Lander Chamber of Commerce is a U.S. Chamber member and shares its benefits with Lander Chamber members.
Source: originally published on the U.S. Chamber of Commerce’s website.
The Chamber of Commerce of the United States is the world’s largest business organization. Its members range from the small businesses and chambers of commerce across the country that support their communities, to the leading industry associations and global corporations that innovate and solve for the world’s challenges, to the emerging and fast-growing industries that are shaping the future. For all of the people across the businesses they represent, the U.S. Chamber of Commerce is a trusted advocate, partner, and network, helping improve society and people’s lives.
