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The top 10 reasons small businesses fail (and how to overcome them)

Are you embarking on a new business venture or facing challenges in getting one off the ground? Unfortunately, around 20% of all new businesses face failure within the first two years! However, this doesn't have to be your fate, so don't lose hope just yet.



Businesswoman with stress, holding her head

While certain factors may always be beyond your control, such as economic downturns, there are several strategies you can employ to ensure that your small business not only survives but thrives! In this article, I will explore the ten primary reasons small businesses fail and provide guidance on how to avoid these pitfalls.

#1. Inadequate Financial Management

Insufficient financial management can severely impact your cash flow and make it difficult to meet timely bill payments. Delays in payments can result in late fees, penalties, and strained relationships with suppliers and vendors. If you struggle to monitor your business finances closely, you may overspend on rent, utilities, and office supplies. Without a proper budget, you might find yourself exceeding your financial capacity, leading to future financial difficulties.

Solution: Initiate the creation of a budget for your business and adhere to it. Maintain accurate financial records to track income, expenses, and profits. This practice will enable you to make informed financial decisions and identify areas for improvement.


#2. Exhausting Financial Resources

Running out of money is the foremost reason why many small businesses are forced to cease operations.


Graphic showing reasons for business failure

Approximately 77% of small businesses globally rely on personal savings for initial business funding. However, personal savings can only provide limited support when additional capital is required to test the market. Small businesses often encounter cash flow challenges after depleting their savings, ultimately leading to closure or bankruptcy.

Solution: Develop a cash flow forecast that predicts the business's inflows and outflows for the upcoming months. Monitor accounts receivables to ensure prompt customer payments. For businesses dealing with physical products, maintain optimal inventory levels.


#3. Resisting Change

Inability to adapt and pivot from your original business idea can hinder success, even in the face of losses. Successful businesses need the flexibility to adjust to market conditions. For example, Starbucks initially sold coffee makers, Instagram began as Burbn (a check-in app), and Netflix started by mailing DVDs before the streaming market almost rendered them obsolete. Every successful brand pivots to adapt and survive changing market conditions.

Solution: Be prepared to abandon your original business idea if the market is evolving or your business is struggling. Do not hesitate to pivot to a new product, service, or business model. Agility is essential, as seen when many businesses moved online or added take-out and delivery options during the Covid-19 pandemic.


#4. Ineffective Business Planning

Overlooking the importance of effective business planning makes achieving your goals challenging. Without a clear understanding of your business goals and objectives, making informed decisions and developing effective growth strategies becomes difficult.

Solution: Construct a realistic plan based on current and future sales projections. While your plan need not be overly complex, ensure it includes elements such as business vision, mission, and goals, market research, competitive analysis, employment needs, potential problems, solutions, and capital requirements.


#5. Mismanagement of Inventory

Inventory mismanagement is a common error that any small business can make. Striking the right balance between supply and demand is crucial. Inefficient inventory management often results in significant cash flow shortfalls. Having too many or too few products can leave you unable to meet customer demands and may lead to increased storage costs.

Solution: Conduct monthly audits to find the balance between supply and demand, preventing excess inventory, obsolete products, or stockouts. Implementing an inventory management software, such as Freshbooks, can automate and optimize the process.

Pro tip: Consider a Just-in-time (JIT) inventory system to order products as needed instead of keeping large quantities on hand.


#6. Lack of Online Presence

With approximately 2.56 billion people worldwide shopping online, transitioning from offline to online business models is crucial in the digital age.


Graphic showing amount of online shoppers

Online marketing is more cost-effective than traditional methods, leveraging social media, email marketing, and online advertising to reach target audiences without significantly increasing budgets.

Solution: Establish a simple website providing information about your product and facilitating online orders. If creating a website is not feasible, sign up for online marketplaces like Amazon or Etsy to start selling.


#7. Attempting to Do It All

Initially, entrusting day-to-day business operations to others might seem challenging. However, to grow, learning to delegate is imperative. Trying to be a jack of all trades is not sustainable, as expertise is limited, and time is finite.

Solution: Embrace delegation to expand and protect your business from failure. Consider hiring or investing in software to automate processes and save time.


#8. Inability to Meet Customer Expectations

Failing to meet customer expectations can lead to a loss of loyalty and trust. Dissatisfied customers may switch to competitors, leave negative reviews, and share their negative experiences, harming your reputation.

Solution: Understand customer needs through communication and tailor your business model accordingly. Excellent customer service is crucial, involving prompt responses to inquiries, addressing complaints professionally and promptly, and surpassing expectations.


#9. Inadequate Hiring

Many small businesses struggle to hire the right talent due to limited resources, a small network, or a lack of hiring expertise. This can result in decreased productivity, low morale, and higher employee turnover.

Solution: If hiring isn't your expertise, bring in an HR manager. Focus on finding candidates eager to learn and fitting the job and company culture.

Pro tip: Prioritise employee retention after hiring.


#10. Fear of Business Failure

A fear of failure can lead to overly cautious behaviour, hindering innovation and creativity. Avoiding risks to prevent failure may stifle growth opportunities.

Solution: Embrace failure as a learning opportunity. Reflect on mistakes, identify areas for improvement, maintain a positive mindset, and focus on strengths and accomplishments.


There's no reason you can't build a successful business and overcome the challenges that have led others to failure. While success isn't guaranteed, perseverance and implementing the solutions and tips in this article can help you tackle any challenges that come your way. The result? A sustainable business that you can develop and scale for years to come.


Want to learn more about growing and managing a new business? Head here: Small Business, Big Impact

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