Why Do Small Businesses Fail? 10 Common Mistakes and How to Avoid Them

Editorial Team

Why Do Small Businesses Fail? 10 Common Mistakes and How to Avoid Them

After being created, most small businesses do not expect to leave the market fast and cease to exist in the early lifecycle stages. Still, many of them tend to fail pretty early due to their owners’ mistakes. According to statistics, about two-thirds of businesses with more than one employee survive at least two years. Still, only 50 percent make it to the five-year mark, and only one-third celebrate their 10th anniversary.

These rates have been more or less stable over the last two decades and are consistent across various industries, including manufacturing, retail, food services, hotels, and construction.

So, what mistakes lead a business to failure, and how to avoid them?

The reasons for failure tend to repeat among the businesses, and it is a deplorable tendency to spectate. To help you avoid this circle of losses, here are the 10 common mistakes made by others before you. Read on, take notes and learn how to avoid them.

1. Starting a business without knowing how to run it.

According to Forbes, more than 500,000 businesses are started every month, and many of them have no idea where to move in the market. It is common among regular workers to think they will do better by being their own boss and establishing a business by themselves. This is why they tend to leave their workplaces, risk it all and… fail.

What these workers don’t realize, however, is that having proper skills for the work is not enough to remain successful. There must also be an understanding of how to run a business, even if you are trying to make something small niche-oriented like an essay writing service. Without this important aspect, their business slowly stagnates, their enthusiasm vanishes, and they return to the beginning: come back to work for a more experienced manager.

You will have a much better chance of success if you start your business fully understanding its purpose and how to run it. These include having a passion for what you will be doing, a positive mindset that keeps you going when others give up, and a willingness to learn the skills needed to run a business.

2. Having insufficient operating capital.

Starting a business without sufficient operating capital is almost certainly a point of death. Many new business owners tend to underestimate the dangers of ignoring the cash flow and drowning in credits and loans.

Let us imagine that a hypothetical professional decided to run a business consultancy firm and underestimated the importance of cash flow management. Before establishing a business, they were paid regularly and had no issues with their lives. Still, after opening their own agency, they found out that clients can take weeks or even months to pay. To survive and help the business stay afloat, this professional starts taking on expensive loans, getting into a never-ending cycle of debts and has no choice but to close their business and find a job with another company.

Protecting and accumulating your capital before you start your business gives you a good cushion for the ebb and flow of your business. In fact, one-third of small business owners have no insurance, and one out of three small business owners get sued in any case and have to spend a portion of their combined capital to solve this process. Getting the right liability insurance for your business is the first step in helping you better manage your cash flow.

Before starting a business, it is vital to determine how much money you will need to cover start-up costs and keep the business running for the first year or two. Use a start-up calculator like the one from the Wall Street Journal. Also, sit down with a financial advisor or scoring mentor to discuss your plans.

3. Inadequate strategic planning

Lack of proper planning is another common reason small businesses fail and cease to exist. Too often, entrepreneurs focused on achieving their dream of financial independence fail to create a strategic business plan that covers competitor analysis, marketing budgets, sales and expense forecasts, and staff needs.

To best ensure success, take the time you need to create an effective business plan before going all in the market. Many companies use specific software to make the job easier and faster. It doesn’t have to have hundreds of pages with every step described up to a millisecond. Even a solid one-pager can be enough if it contains all the necessary information and analysis.

4. Trying to expand the company too early

Another popular reason for failure and bankruptcy among small companies is overestimating their possibilities in terms of market and internal expansion.

Review, research, and analyze your needs for new facilities, software, and number of employees before deciding to expand your business structure. You might be able to do most of the regular tasks yourself early in your business life, but that will not be the case after your growth. Remember: slow and steady wins the race.

5. Providing poor management

Effective leadership and management skills are essential to successful business building. The lack of either can lead to reduced (or zero) productivity, confusion and conflict within the ranks, and poor staff morale.

To run a successful business and survive the turbulence of the first years on the market, one needs to acquire leadership skills and strengthen the areas of their weakness. Take a decent leadership course, read books about it, or join peer advisory groups. Your employees trust and follow you, so lead with confidence and knowledge!

6. Ignoring the importance of advertising and marketing

When business is good, it pays to advertise, but you should advertise it yourself when business is bad.

Many businesses with solid planning and talented leaders may fail because their owners did not maintain the advertising and marketing campaign. The “if you build it, they will come” mentality doesn’t work in an age of market diversity, where the choice for the buyers is huge. You have to show yourself and get your message heard first.

Sticking to just traditional ways of advertising may still be handy, but in the digital age, creating a website and social media profiles is most effective. In the era of digitalization, where people prefer buying everything online, not having a site means leaving lots of marketing opportunities and potential clients behind, which is unacceptable if you want to reach success.

While you’re at it, set up profiles on the social networks where your potential customers hang out the most. You can also pay for Instagram, Google, and Facebook advertisement to make the most of it with fewer costs.

7. Taking up too many tasks and responsibilities and not delegating them.

Entrepreneurs can often be their own worst enemies, as they take up all the tasks in their business and do them themselves, even while they have other workers. And this is unhealthy both for the company and the entrepreneur.

“If you want something done right, do it yourself” – sounds familiar, doesn’t it? If this is your creed in business, you will not survive long and will rapidly burn out. Doing everything yourself ends where your freelance grows into something bigger. No matter how genial they are, a person cannot be able to run every aspect of a business.

The solution, in this case, is to learn to delegate small routine work (for example, ordering supplies for the office) to others while focusing on tasks that contribute to the company’s growth and staff development.

8. Determining a wrong business model

Just because you have a business idea that you’re excited about doesn’t mean it will work out in reality. That’s where creating a business plan, conducting marketing research, and seeking advice from others can be a lifesaver.

It is also handy to think about some successful business models that have proven their efficiency in the past, the customer base for your product or service, costs, and periods needed to bring the business to market.

9. Not being able to differentiate your product.

As an entrepreneur, you have probably heard of a UVP (unique value proposition). That describes the qualities, features, products, or services that differentiate a business from its competitors. The problem is that nowadays, it is harder to have a true UVP, and many small businesses fail to clarify what theirs is because of their lack of familiarity with their own company.

Having a determined UVP clarifies all possible ways to create value for your customers and even helps you design products and services that satisfy your target market’s needs and wants. This is why you should analyze it and clearly communicate it to customers and staff.

10. Underestimating the competition

Even if you have a stable operational capital, a solid business model, and all the necessary management skills, you still face the most unpredictable challenge – your future competitors.

Sometimes your competitors will be way tougher and more experienced than you are, have a more developed retail structure, or have more innovative products. In addition, you should not ignore the disruptive new companies that may be building a cheaper, better, faster and more convenient mousetrap.

To increase your chances of success, do not forget to analyze competitors in your overall market analysis. Assess their strengths and weaknesses and implement strategies to improve your own competitive advantage.