7 reasons why businesses fail and how not to

Chris Andreou

April 21, 2021

why do business fail guide
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Introduction

A large percentage (some say as many as 80% in the first two years of operation, though numbers vary by country and industry) of small businesses fail early on.

Some of the reasons why these businesses go under are unavoidable, such as a rapidly diminishing demand for a product at a time like a recession.

However, many avoidable causes also exist; small business owners are often new to owning a business, so they skip steps or are never informed of how to move forward to long-term success.

Here are seven common reasons why people don't maintain their small businesses, and how you can avoid letting your new small business fail. You can learn from these lessons now and see your business thrive.

Common Mistakes That Damage Small Businesses

1. Misunderstanding the Market

Many small businesses, at their heart, are about a great idea.

Your idea can be incredibly clever, or you can be better in your process at providing this good or service, and there can still be factors outside of yourself that impact how your sales evolve. Namely, the demand for your product or service, as well as the number of competing products and services that already are being considered by your potential customers.

New small business owners sometimes do not take adequate time to evaluate who will purchase their product or service, and they dive in head-first before they know just how competitive the market will be.

Luckily, doing your research is all it takes to avoid this fate.

Yes, you might be going into a difficult, competitive marketplace, but if you know that is the case, you can prepare yourself by having a clear and differentiated competitive advantage, offering excellent pricing, and focusing on niche customer segments and serving them better than anyone else. Great market research can fuel your desire to get out there and get in-person time with potential clients.

2. Underdeveloped Business Plans

A business plan, complete with all the paperwork you need to incorporate your company, is one of the ways that the most prepared new business owners plan for their company and execute those first important decisions as their companies grow.

The process of creating a good business plan in and of itself helps business owners think through critical aspects they may not have considered. Those who rush through the business plan or decide they will figure things out as they go are often fatigued, surprised by decisions, and unlikely to be fully organised in their approach to business expenses.

The plan can be flexible, but it really does need to be written out in order to be useful to you as a guiding document. Knowing what you intend to do as your company reaches different milestones and decision moments is incredibly essential in making sound business decisions.

Get the help you need with your business plan, whether you are operating as a sole trader or as a limited company.

The only way you can "over-plan" for your business is by becoming overly attached to one potential path forward. Plans help you think through your options, and that tends to mean you are more prepared when a surprise arises and ready to pivot if required.

3. Not Fully Committing to the Business

It's easy to keep in the back of your mind that you'll get a job as an employee if the small business owner plan doesn't work out, but it is often better to fully commit to the venture, since daydreaming about an easier path may be enough to make you not succeed.

It's a self-fulfilling prophecy when you think you might fail and then you don't put in the requisite hours to ensure your company's success.

There are many ways to commemorate your full commitment to your business that remind you, day in and day out, that you are a small business owner who is striving for success.

For instance, even if you could get your mail at your home address when your company is starting out, many people see a business as more prestigious if it has a business district address; consider a virtual office as a way to remind yourself that you are a "real" small business, that you want to reach a certain calibre of clientele and provide a very high standard of service.

4. Not Working With an Accountant Early Enough

Too often, small businesses think that they can handle all the books themselves, when in reality, a great accountant would save them money and financial headaches.

Many of us are not blessed with an accounting background, and do-it-yourself tends to be an expensive choice if you aren't fully appraised of your own tax and legal situation.

On the other hand, an experienced accountant that works with freelancers and small businesses can be an easy way to avoid this pitfall. Working with an accountant will not only help you with your current tax liability and other needs, it will also help you understand what needs to change as you scale your company and grow.

5. Ignoring the Customer's Input

When overwhelmed, many small business owners become overly focused on their original plans and try to just do more of the same thing, rather than better.

Often, customers are willing to voice (sometimes frustratingly loudly) what made them so dissatisfied with an initial product or service. Yes, these statements can be painful at first, but listening to these complaints carefully is necessary for the small business to survive!

By paying attention to customer complaints and input, you learn so much about what is and is not working for your small business.

Each piece of feedback is an opportunity to slightly refocus your efforts on what matters most to the customer and slightly less on whatever you thought would be important but, it turns out, doesn't matter. These efforts will help you retain customers. A loyal following can be a major aspect of business success.

6. Not Understanding and Managing Cash Flow

You've made a decision about how much "runway" you have as a business, be it from investors, family and friends, or your own savings. This money is what you have to operate the business until you are bringing in more money than you are spending.

One of the biggest reasons that small businesses fail is that they don't account for what expenses can reasonably be made given their runway, and which ones must wait until they are breaking even. Cash flow refers to having enough money to pay for anything you absolutely need now, even if you know that there will be payments in the mail soon.

An experienced accountant can give you sound advice on how to manage your cash flow, delaying expenses when they will harm your ability to continue doing business and seizing opportunities to maximise growth when they come along.

Managing your cash flow will reduce stress, making continuing to run your small business that much more attractive, but they will also keep the doors open and the lights on.

7. Rigid, Inflexible Business Model Without Room for Growth

Whenever a small business finds initial success, the owners face another hurdle almost immediately: what does it look like to scale this business to a new level?

Owners who, for instance, were very good working with a three-person team may realise that managing multiple layers of employees requires skills they do not have. As a small business owner, your business model must be viable as a start-up, but it also needs a path to long-term sustainability at whatever level you desire to reach, be it a small lifestyle business or a multi-national corporation.

Creating a business model that assumes you will never hit a certain amount in sales is just asking for the universe to give you more than you can handle.

Make sure that your business plan accounts for precipitous growth, steady growth, or sluggish growth of demand for your product or service. Plan from the beginning on a way to feel successful and make wise decisions no matter how the market treats your company.

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How to Be the Exception and Thrive as a Small Business

owner-of-small-business-packaging-products-and-looking-at-laptop

So you want to make sure that your company isn't one of the ones that fails early? Much of the advice above can be distilled down to a few simple strategies:

  • Plan The Things You Can Control for Many Potential Versions of the Future: From your business plan to your growth strategy, you are better off if you think about the ways things can go. Yes, this can be intimidating in the moment, but you'll be that much more prepared than another small business owner who simply is overwhelmed by every new experience.
  • Resisting Feedback: You want to know, whether it is from the behaviour of a competitor or the complaints of your customers, how you can do even better than you are doing now. It's worth a little frustration to know what might sell better in the future.
  • Inflexibly Approaching Your Business: Small businesses thrive when they can take advantage of opportunities, not stay the course exactly as planned in spite of the signs of struggle.
  • Get the Help You Need: From virtual office services to accounting, business advice and community, Forma has created a one-stop location where you can get resources to lower the barriers around small business ownership.

Limited Company Expenses Guide

What's Inside:

  • Allowable business expenses
  • Employee expenses
  • Travel expenses
  • Office & equipment expenses
  • Professional services expenses
  • General expenses
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Limited Company Expenses Guide

What's Inside:

  • Allowable business expenses
  • Employee expenses
  • Travel expenses
  • Office & equipment expenses
  • Professional services expenses
  • General expenses

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Here are several key questions that can guide you through the process of creating your business plan:

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7 reasons why businesses fail and how not to Guide

7 reasons why businesses fail and how not to

A large percentage (some say as many as 80% in the first two years of operation, though numbers vary by country and industry) of small businesses fail early on.

Some of the reasons why these businesses go under are unavoidable, such as a rapidly diminishing demand for a product at a time like a recession.

However, many avoidable causes also exist; small business owners are often new to owning a business, so they skip steps or are never informed of how to move forward to long-term success.

Here are seven common reasons why people don't maintain their small businesses, and how you can avoid letting your new small business fail. You can learn from these lessons now and see your business thrive.

Read Full GuideRead Full GuideCalculate Now

Download Now:

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Oops! Something went wrong while submitting the form.

Limited Company Expenses Guide