August 3, 2022

Why Small Businesses Fail: How to Avoid the Most Common Pitfalls of Start-ups

Success-minded entrepreneurs drive themselves and their companies forward through optimism, diligent planning, and strategic action. However, although having the right mindset is critical for getting a small business off the ground, it's also important to know the most common causes of small business failure. After all, if you don't know the pitfalls and stumbling-blocks that frequently lead to disaster, how can you avoid them? With only 35 percent of small businesses surviving past the 10-year mark, you must take steps now to ensure your longevity. Read on to find out exactly why small businesses fail and how you can keep yours afloat.

Not Having a Quality Website and a Solid Online Presence

No matter what industry you're entering, it's important to have an online presence. Most consumers are using the web to find and compare businesses, inform their purchasing decisions, and complete transactions. Even if you have ambitious, outbound marketing campaigns that include mailers, fliers, signage, and other elements, you'll need the web to effectively reach the largest portion of your available market. If you aren't leveraging the web to build your commercial reputation, find and convert prospects, and educate your market, you're guaranteed to miss out. Companies that lack websites, active social media profiles, and other online elements constantly miss out to their competitors.

Insufficient Planning

Good ideas can only go so far without adequate planning. The web has it possible for just about anyone to start a business. Online sales platforms and marketing tools allow new business owners to sidestep a number of start-up costs that were once unavoidable. It's no longer necessary to have brick-and-mortar headquarters for businesses. With just a few clicks, you can equip your new company with mobile payment processing tools and other essentials that allow you to work out of your home, your truck, or any other location of your choosing.

However, the ease with which a new business can be started doesn't negate the need for good business planning. Of the nearly 65 percent of businesses that fail before they've completed their first full decade of operation, most lack solid business plans. If you don't know how to write a business plan, you should get help before seeking funding, spending money, or opening your doors. Having a well-mapped plan for your business will make it possible to get funding from serious investors. It will also allow you to anticipate funding, effectively manage your overhead costs and manpower, and more. Your business plan should include:

  • A detailed description of your business and its goals
  • Manpower needs
  • Marketing and promotions plans
  • Competitive analysis
  • Market analysis

It should also have an in-depth breakdown of your business finances including a sales and expense analysis, cash flow analysis, income, and more. If your business plan is missing these or any other essential elements, critical oversights could leave you scrambling to stay afloat early-on.

Expanding Too Quickly or Too Much

Small amounts of success early-on can cause new business owners to confidently expand their operations long before the time when they can safely and comfortably do so has arrived. Rapid expansion can be devastating for a new company that isn't ready for it. Moreover, what works well in one location isn't guaranteed to work well for another. The business plan for an initial establishment cannot be recycled for a brand new one. Costs, competition, and many other factors will invariably change. Each new location will place stress on the first one. Early success is not a measurement of readiness for expansion.

Choosing the Wrong Location for Your Business

Choosing the right location is key for a number of reasons. If you'll be running a brick-and-mortar establishment, you want your chosen area to have a nice flow of traffic, access to adequate parking, and sufficient safety for ensuring that people feel comfortable visiting. You also want to make sure that the traffic you're getting is both qualified to purchase what you're offering and in need of it.

Not Every Market Is a Viable One

For every product or service, there is always a finite number of people or companies that will want and need it, and that are actually qualified to buy it. Careful study of your market will reveal whether or not it is already saturated by excess competition. It will additionally show you your ideal price point for your services and products for maintaining both a competitive edge and a reasonable margin or profitability. If there are 17 coffee shops within a relatively small geographic territory, you'll need to find out if there are enough regular coffee drinkers to reliably support another one. When markets are near the saturation point but are still desirable in other ways, it may be necessary to expand your vision so that you can offer things your competitors are not. You can innovate to make your business stand out. Making sure that your market is viable before entering it is key for avoiding substantial loss and disappointment. Keep in mind that even if the product or service you intend to sell feels like an essential one to you, other consumers may not see it as so. Some companies have no viable market at all.

Not Having Enough Operating Funds

Insufficient capital is the bane of new businesses. In fact, it can drive companies to a grinding halt, undermine their efforts to build respectable reputations, and give their competitors the opportunity to step in. You cannot replenish a dwindling inventory unless you have the necessary capital. You can't upgrade payment processing platforms, expand your marketing campaigns, or even keep the lights in your brick-and-mortar establishment on unless you have the funds for doing so.

Bad Business Management

Poor management can drive a company into the ground at any stage of development. Well-established businesses fold all of the time due to poor management. However, brand new companies are especially susceptible to this pitfall. Poor management can result in:

  • Dismal customer service ratings and an unhealthy commercial reputation
  • Waste resources
  • Costly redundancies
  • An unhappy workforce and ultra-rapid employee turnovers
  • Low morale
  • General neglect

For micro-sized businesses, bad management falls entirely on the shoulders of business owners themselves. For small businesses, poor management can be attributed to bad hiring decisions. Many small business owners make the grave mistake of hiring under-qualified family members and friends when they really should be looking for the top talent in their industries. When companies fail due to bad management, lack of experience and lack of market-specific experience rank among the top reasons why.

You Had Unrealistic Expectations When Starting Your Business

Starting a brand new business won't give you more time to spend with your loved ones or more time to enjoy your favorite forms of recreation. It isn't going to make you a millionaire overnight. Success stories that laud these results are often untrue. When people do experience rapid success and still have lots of free time on their hands, they represent rare cases. Starting a successful small business will likely require you to work harder than you ever have before. However, with the right planning, adequate capital, and careful decision-making, it can provide outstanding rewards.

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