The top reasons small businesses fail
Small-business failure is common. Statistics are hard to pinpoint, however the rate of failure tends to be high. The U.S. Small Business Administration states that "roughly 50% of small businesses fail within the first five years." These are difficult odds for small start-ups face.
There are a combination of reasons that contribute to small-business failures. Some of these factors are external, but many are internal and can be mitigated by a small-business owner with good planning. There is no one single reason, but there are some commonalities.
Lack of knowledge, vision and planning
Vision planning requires a clear focus on the type of business being opened. If an idea does not sell, the business ultimately fails. Visualization includes a blend of understanding current trends, predicting future opportunities, choosing a good location and determining whether the selling idea can yield long-term results. Strategic vision and planning are key factors to understand when developing a small-business plan. Without them, rate of failure increases.
Poor financial planning
Small-business owners who have insufficient capital may develop financial trouble early on. To succeed, a company needs to have a reserve of cash until a profit is realized. Rarely is it a viable idea to deplete financial resources or count on personal assets to completely fund a business.
Owners who overborrow, don't keep reserve funds or otherwise overextend their finances often find themselves in dire straits. Many businesses operate in the red for the first year or two, and during this timeframe, owners need to account for paying back loans while managing day-to-day expenses. It is common to have an initial absence of cash inflow; thus sound financial planning is critical before opening a business.
Faulty management
Operational and marketing management are important. Daily operations that need to be accounted for include customer service, staffing, technology and, if applicable, inventory management. Small-business owners who cannot effectively identify a unique selling niche, classify the correct target market segments or obtain visibility through a Web presence can develop problems leading to failure.
Faulty planning and management in any aspect of running a business contributes to failure. While opening a small business is risky, avoiding frequent problems can mitigate collapse. With good planning and a solid strategy, business owners who effectively navigate the pitfalls can increase their chances of success.
