Why do small businesses fail? That’s the million-dollar question. Starting a business is not easy, and there are countless statistics out there about the survival rate of startup companies.
Here are a few popular ones:
- Only about 20 percent of new businesses survive their first year of operation.
- The U.S Census data shows that new business creation is nearly at a 40-year low.
- Half of small businesses fail within their first five years.
Whether you’re a seasoned small business owner or an entrepreneur just
starting out, these statistics can be a little scary. What you probably
don’t realize is the sample of small companies cited in these
studies. Fit Small Business does an excellent job of debunking some of these numbers and defining
the types of companies taken into consideration.
The point is that while there may be some truth to these numbers, you
shouldn’t let it kill your entrepreneurial spirit. Instead, try to
understand the major reasons why small businesses fail. If you understand
the mistakes of others, you can avoid following in their footsteps.
Here are 10 reasons why small businesses fail.
10. No Business Plan or Poor Planning
This reason is especially true for brand new small business owners. What you
think sounds like a good business idea on paper may not fare so well in
reality. (For some hard truth, see the fastest-growing occupations as measured by the Bureau of Labor.)
This doesn’t mean you should ignore your passions. Instead, it means you
need to do a little research and business planning.
A business plan forces you to define your Unique Value Proposition (UVP) — what
differentiates your project from its competitors. In a sea of food trucks gathered in a parking lot, how will yours stand out? Is it the food?
Is it the service? Is it the neon hues and festively decorated truck? Is it
the daily social media promotion? Likely, it’s all of the above. Maintaining
a sustainable business model requires setting yourself apart from
competitors.
Other important considerations include: Who comprises your customer
base? How will they buy your product or service— in-store, online, or both? What’s your
marketing plan? How will customers find out about your business? What are
your cash flow projections? Your startup capital? How far will your cash
reserves take you? Remember to factor in both business and living expenses,
as most businesses are not profitable during their first year.

Answering these kinds of questions while your business idea is still in the
planning stage will help you boost the probability of your product or
service becoming a success.
9. Failure to Understand Customer Behavior Today
In our connected age, ‘the customer is always right’ rings more true than
ever. For example, today’s consumers expect small brick and mortar companies
to accept credit cards and “currencies” like Apple Pay, even if the
shop is a tiny mom and pop operation. And they demand quality customer
service. If you don’t deliver it, expect your customers to complain loudly
on social media and with other communication tools.
For better or worse, review sites and platforms amplify word-of-mouth
marking.
In our digitally obsessed society, it’s easier than ever for customers to share their thoughts and opinions about the businesses they interact with — which means it’s easier than ever for business owners to monitor and solicit customer feedback.
In our digitally obsessed society, it’s easier than ever for customers to share their thoughts and opinions about the businesses they interact with — which means it’s easier than ever for business owners to monitor and solicit customer feedback.
Not sure where to start? Here is a list of channels to help you monitor
feedback and engage in conversations with customers.
Social Media. All social media platforms (Facebook, Twitter, Instagram, Pinterest, etc…) are great social
listening tools that make it easier than ever to listen to your customers.
In fact, in today’s world, using a social media platform to contact a
business is often preferred by customers as a faster alternative than
traditional phone calls. Thanks to push notifications that alert you when
your business has been mentioned, re-tweeted, liked, pinged, or poked,
knowing when to engage with customers is easier than ever.
Yelp Reviews. Yelp is one of the go-to destinations for people who want to find local businesses. With over 148 million
cumulative reviews, it’s also a great place to find out what customers are
saying about their experience with your business. If a company receives a
poor review, Yelp encourages the business owner to jump into the
conversation, so you have an opportunity to apologize or explain.
Google Reviews. Just like Yelp, this a more passive channel than social media, but
nonetheless, very important. Google is dominating the review market
with 6 in 10 consumers now looking to Google for reviews. Since literally everything is
Googled these days, your business’ Google reviews are likely one of the
first things a user will notice about your business.
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Dedicated Customer Advocacy Websites. One of the most trusted websites for consumer reviews is Trustpilot. With over 45,000 new reviewers each day, they’ve built an entire online review community dedicated to helping customers share their genuine experiences.
Customer Surveys. Surveys are still one of the best ways to ask customers specific and
direct questions. If you collect customer email information at the
point of sale, you can quickly identify your top customers and previous
customers who are less engaged. Using this data, you can create a survey for
free using SurveyMonkey to find out how you can improve your business. It doesn’t hurt to
offer an incentive for completion, like a discount on their next purchase.
With 85 percent of consumers saying they trust online reviews as much as personal
recommendations, it’s imperative that your online reputation is intact so
that potential customers aren’t turned off by poor reviews. At the very
least you should try to make sure your positive reviews outnumber the
negative ones. While poor reviews may not bring down a startup on their own, they play a large role in
the success of brick and mortar businesses.
8. Inventory Mismanagement
Your business startup cannot be successful if your inventory is poorly
managed—full stop. According to the Small Business Administration (SBA), problems with inventory ranks among the major reasons new businesses
fail. Poor management can often lead to inventory shortages and overages —
silent cash flow killers.
It’s a rookie mistake that easily happens to new businesses that don’t
understand their sales patterns. The best way to combat this is to use
inventory management software or a point of sale (POS) system that
can track inventory and provides reports detailing your best and worst
selling products to help you identify sales patterns.
If you’re not keeping track of your top-selling items or when they’re in
high demand, you’re going to experience inventory shortages that will shrink
your profits.

As a merchant, you take on risk when you buy large amounts of inventory with
the goal of selling it for a profit. If you don’t sell those products as
quickly as you forecasted, they can lose value or become obsolete. This
forces you to sell them at a deep discount, or not at all. Until you can
recoup your money by selling the inventory you have on hand, your capital
will be tied up in a lot of unsold inventory.
Picture this. Instead of thinking of stock items as inventory lining your
shelves, think of it as piles of cold hard cash. Each product in storage or
your local warehouse is cold hard cash you’ll never see since it’s not
contributing a return on investment (ROI).
The harsh reality is that U.S. retailers are sitting on $1.43 of inventory for every $1.00 in sales they make. Proper inventory management using modern tools will ensure
you’re not one of them.
7. Unsustainable Growth
In business, slow and steady wins the race most of the time. Expanding too quickly, which usually entails financing on credit like a small business loan, can
backfire if the market changes or you hit a rough patch.
Trying to take on more business than you can handle drains your working
capital and usually results in a quality decline. You are overwhelmed and
your product or service suffers.
Instead, be smart about which customers you court, and how you will pay back each business loan. Saying no is part of running a business.
Instead, be smart about which customers you court, and how you will pay back each business loan. Saying no is part of running a business.
6. Lack of Sales
On the other end of the spectrum, nothing hurts a new business faster than
not reaching its sales goals.
This can happen when you reply too much on one large customer. If your cafe
depends on student traffic during the school year, you will need to
diversify come summer to stay afloat.
The only way to make sure you’ll hit your sales targets is to gain insights from existing data and use those insights to inform your sales strategy. A quality point of sale system is a good place to start.

5. Trying To Do It All
Small business owners are a scrappy bunch, and tend to view themselves as
Jacks (or Jills) of all trades. But entrepreneurs, like all people, have
strengths and weaknesses, not to mention a finite number of hours in each
day.
Delegation is your friend. Whether that means hiring your first employees
or investing in software that cuts down on busywork, your business
will only start making money once you offload some of your responsibilities
onto other qualified shoulders.
4. Underestimating Administrative Tasks
When you were planning your company, maybe you imagined happy customers,
smart marketing, and of course, plenty of cash. You probably didn’t imagine
spreadsheet after spreadsheet. But large chunks of running a business
revolve around administrative tasks.
From inventory management to managing employees to all the bookkeeping and
accounting involved in the endless quest to meet your financing goals and
turn a profit, administrative responsibilities can easily eat up your entire
day.
According to a poll conducted by SCORE, 47 percent of small business owners dislike the financial costs associated with bookkeeping, and 13 percent dislike the
administrative headaches and the amount of time it sucks out of their
workday.
So be prepared. Hire accordingly or outsource many of your rote tasks to
technology. As an example, TechVolks’s iPad point of
sale seamlessly integrates with QuickBooks, so you never have to manually input your sales data. Shortcuts like this
save you time, and time is money.
3. Refusal to Pivot
That’s right, old-fashioned stubbornness comes in at #3 of the top reasons
small businesses fail. It’s easy for entrepreneurs to become obsessed with their business idea or product, even when all evidence points to
it not being a success.
Maybe by the time your brick-and-mortar store is celebrating its second
anniversary, all the excitement and shininess of your new store has worn
off, and fewer locals are walking through your doors. Now what? Do you
become a statistic and resign to failure, or do you take the time to figure
out where you need to adapt? Maybe you pivot to appeal to tourists, or stock
a different type of merchandise that appeals to your customer base, or use
your space to host weddings and parties on the weekends.
Sometimes an effort to pivot to eCommerce can backfire. Typically, physical
stores and digital stores will share inventory. And while you may keep them
in separate storage areas, if you sell out of an item online faster than
in-store, you’ll have to fulfill some of your online orders from your store
inventory. Unless of course, you’d rather ship to your warehouse first and
then ship to the customer — causing unnecessary delays and a poor customer
experience. To avoid this, invest in a POS system that automates
the exchange between online and physical inventory.

2. Lack of Data
Your small business is competing with cash-rich behemoths like Wal-Mart and Starbucks. What do those
giants have at their disposal? Data. Tons of data.
Though your market is much smaller, you should still gather as much
information as you can. If you don’t have insight into the performance of
your business in real-time, it will drastically limit your ability to make
smart, data-driven decisions.
For example, you need complete visibility into the revenue you collect and
the expenses you pay. Without this knowledge, you are literally flying
blind.
On the expense side of the equation, if you want to buy a new line of
inventory or make some updates to your storefront, you need to know how it’s
going to impact your bottom line. And it’s not just these expenses you need
to keep an eye on, but all of your costs.
As a business owner, you need to know what percentage of revenue you can
allocate to employee wages, utility bills, or rent so you can set proper
targets for cost savings. On the revenue side, you want your business to
grow month over month or year over year.
If you don’t achieve your goals, you may want to examine areas of your business where you’re overspending — i.e., the expense side. To ensure your expenses don’t exceed your revenue and turn your business into a failure rate statistic, it’s helpful to know your net income.
First, you need to define your Gross Profit (GP) by taking the
Cost of Goods Sold (COGS) and subtract the number from the total net sales.
If you’re using a POS system like techvolks, you can find reports like
these, and more in BackOffice.
The second factor you’ll need in this calculation is your Operating Profit
(OP). To find the OP, you need to subtract your operating expenses (i.e.,
payroll, rent, utilities) from your gross profit. If you’re using accounting
software, you’ll easily be able to retrieve this information.
Lastly, you have non-operating expenses. These are expenses that are not
related to core business operations like your operating profits, but rather
taxes or interest you may have on loans or cash advances. Non-operating
expenses are subtracted from your operating profit to yield your net income.
The secret to running a lean business is a long-term, ongoing
strategy that strives to eliminate waste to improve efficiency, agility, and
quality of business operations — all while maximizing value to customers.
While this seems like a contradiction, doing more with fewer resources, it’s
much easier than you think once you break it down into small steps. The
ideology of a lean business is built on the methodology of
build-measure-learn.
Build. The
main idea behind build is that Rome wasn’t built in one day. Nor was
Google’s Gmail, Apple’s iPhone, or mega-retailer, Amazon. Businesses don’t
start out doing all the cool and fancy things they’re known for today. For
instance, Amazon started as an online bookstore, and now they deliver
groceries to your and provide streaming music services. The point is these
companies started with a basic idea, or in the business world, a Minimum
Viable Product (MVP) that they can introduce to the market.
Measure. Next,
these companies measured. They measured the results of the MVP during the
experimental stage. How did the market respond to your product or business?
Did they react the way you expected them to, or was the reaction the
complete opposite of your hypothesis?
Learn. Once
you have some reliable data measurements, you can then determine which
direction to move based on the results of that data. Have you been right all
along and now you have the data to back it up? Or did the measurements
provide you with some insight into areas you can improve?
To apply this to your small business, you need to go back and look at your
business plan. What are you trying to build? What are your goals? What is
the bare minimum you need to get started?
Whatever the outcome, know that it is backed by reliable data that you can
trust to help pivot your business in the direction that will help it be most
successful.
Operating a successful business is not something you can leave up to chance
or luck. It takes a clearly defined business plan, strategic operations, and
sound financial management from startup and throughout the life of your
business.
Real-time data dramatically reduces lag time between data collection to data
analysis, thus making your business more agile and responsive to changing
trends. And if there’s one thing every small and medium-sized business has
over big-box retailers is the innate ability to be agile because they don’t
have to cut through the corporate red tape to make changes. They can see the
data trends in real-time and respond accordingly.
1. Poor Management
We’ve finally reached the #1 reason why a new business might fail.
Entrepreneurs have power over their businesses, and with great power comes
great responsibility.
Management is partly about attitude and mindset — and it does have an effect on
your bottom line.
Sometimes small business owners become set in their ways when it comes to
doing certain things. This is especially true for veteran business owners.
For new entrepreneurs, make sure you don’t fall into this trap. And to be
fair, it’s not just business owners. It’s everybody. It’s human nature, and
we are all guilty of it at some point in our lives.
Assumption and complacency typically happen when a business is doing well
and fall into a false sense of security that your business is operating in
the best possible and most productive way. That’s precisely when fallacy
swoops in and wreaks havoc if you’re not careful.
These ten reasons should give you a solid understanding of how to turn around a failing small business so your company doesn’t become a failure rate statistic.
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