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10 Reasons why small businesses fail

by | Apr 2, 2023 | Business

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Are you daunted by starting your own business or struggling to keep it afloat? Unfortunately, research has shown that around 20% of new businesses fail within the first two years. But don’t throw in the towel just yet! Although there will always be factors beyond your control, such as the economy, there are ways to ensure your small business survives and thrives. In this article, I’ll explore the top 10 reasons why small businesses fail and how to avoid them. By understanding these pitfalls and implementing the solutions, you can set yourself up for success in the long run. Plus, as a bonus, I’ll introduce my Marketing Agency’s comprehensive solution to help you quickly establish and run your online business. So, let’s dive in!

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#1 Poor Financial Management

One of the top reasons why small businesses fail is poor financial management. Getting caught up in the excitement of starting a new venture is easy, but neglecting your finances can quickly lead to trouble. Without a clear understanding of your cash flow, you may struggle to pay bills on time, resulting in late fees and damaged relationships with suppliers and vendors. Moreover, poor financial management can also lead to overspending and an inability to manage expenses, putting your business at risk of financial difficulties.

Solution: Start by creating a budget for your business and stick to it. Keep accurate financial records to track income, expenses, and profits. This will help you make informed financial decisions and identify areas for improvement. By maintaining a solid handle on your finances, you’ll be better equipped to manage your cash flow, pay bills on time, and keep your business thriving. Remember, good financial management is essential for the success of any business, no matter how big or small.

Reasons Why Small Businesses Fail - Running Out of Money

#2 Running Out of Money

Running out of money is the number one reason why most small businesses have to shut down. According to statistics, 77% of small businesses worldwide rely on personal savings to initially fund their business. However, there’s only so much personal savings can supply, especially when a cash infusion is needed to test the market. Once small businesses exhaust their savings, they often face cash flow issues that become too big to handle, leading to closure or bankruptcy.

Reasons why small businesses fail - Running Out of Money

Solution: It’s crucial to develop a cash flow forecast that predicts your business’s inflows and outflows for the coming months to avoid running out of money. Keep an eye on account receivables to ensure your customers pay on time, and if you sell physical products, maintain optimal inventory levels. These steps will help you manage your cash flow and avoid unexpected expenses, giving your business a better chance to succeed. Remember, running out of money is preventable and can be managed with proper financial planning and management.

#3 Failing to Pivot

One of the small businesses most common mistakes is failing to pivot when necessary. When you’re too attached to your original business idea, staying flexible and adjusting course becomes impossible, even if it means making a loss. To be successful, all businesses need to be able to adapt to changing market conditions.

Solution: Be prepared to let go of your original business idea if your business is struggling or the market is changing. Don’t be afraid to pivot to a new product or service your customers want or even a new business model. Remember what happened to many offline businesses during the Covid-19 pandemic? Many had to move online or add take-out and delivery options. You must be agile and ready to do something like that to survive in today’s dynamic market.

Take Starbucks, for example. Initially, they sold coffee makers, but they pivoted to selling coffee after realizing the demand for it. Instagram started as Burbn, a check-in app, but shifted to focus on photo sharing when they noticed users were really interested in it. Netflix launched by mailing DVDs before the streaming market made those almost obsolete.

Every brand pivots for one reason: to adapt and survive the changing market conditions.

#4 Poor Business Planning

Poor business planning can cause chaos and confusion and make it difficult to reach your goals. Without a clear understanding of your business’s goals and objectives, it’s challenging to make informed decisions and develop effective strategies for growth.

Solution: To avoid ineffective business planning, create a realistic plan based on present and future sales projections. Your plan doesn’t have to be complicated, but make sure it includes the following:

  • Business vision, mission, and goals
  • Market research and competitive analysis
  • Employment needs
  • Potential problems and solutions
  • Capital needs for all business operations.
Inventory Mismanagement

#5 Inventory Mismanagement

Inventory mismanagement is a rookie mistake any small business can easily make. First, you must find the right balance between supply and desire. Inefficient inventory management often leads to a significant shortfall in cash flow. You will either end up with too many products or not enough, leaving you unable to meet customer demands. Holding excess inventory can also result in increased storage costs.

Solution: Conduct monthly audits and find the balance between supply and demand to avoid excess inventory, obsolete products, or stockouts. An inventory management software like Freshbooks can help you automate and optimize the whole process.

Pro tip: Implement a Just-in-time (JIT) inventory system to order products as needed rather than keeping large quantities on hand.

#6 The Importance of Having an Online Presence for Small Businesses

In today’s digital age, not having an online presence can be detrimental to small businesses. With more than 2.56 billion people shopping online, businesses that lack an online presence are missing out on a vast market opportunity.

Moreover, an online presence offers several benefits, including cost-effective marketing, wider audience reach, and increased brand awareness. With social media, email marketing, and online advertising, small businesses can create targeted campaigns to reach their ideal customers without breaking the bank. Online marketing is more effective than traditional.

How many people shop online

Solution: For small businesses looking to establish an online presence, creating a website that showcases their products or services can be an excellent starting point. This website can serve as an online storefront, providing potential customers with information about the business and creating an online ordering funnel. If creating a website seems daunting, small businesses can sign up for marketplaces like Amazon or Etsy to start selling their products online. Nevertheless, the best option is to create an online business and get your website as an asset to generate income.

#7 Inadequate Delegation

Attempting to handle everything yourself can lead to burnout and negatively impact your business. Delegation is essential to enable growth and development in any company. Recognizing that you can’t be an expert in all areas is the first step toward effective delegation.

Solution: Delegation can come in many forms, from hiring employees to investing in automation software. Identify the tasks that must be delegated, delegate them to trusted employees or software, and provide adequate support and training to ensure they are performed efficiently. Remember, delegation is not a one-time event but an ongoing process that requires continuous assessment and adjustment.

Another approach that small businesses should consider is outsourcing. Outsourcing involves hiring an external company or individual to handle specific tasks or projects. This can be beneficial when the business lacks the in-house expertise or resources to complete the tasks effectively or needs to focus on core business functions. Outsourcing can also provide cost savings in some cases.
Therefore, hire us to handle technical tasks while you focus on more important aspects of your business – check the complete solution offer.

#8 Coping with Customer Expectations in Business

Meeting customer expectations is essential for the success of any business. Failure to meet customers’ needs and demands can lead to losing trust and loyalty, resulting in customers switching to your competitors. In addition, negative reviews and poor word-of-mouth marketing can harm your reputation.

Solution: To cope with customer expectations, it is essential to understand their needs and tailor your business model accordingly. Building a customer-centric approach and providing excellent customer service is vital to meeting their expectations.

This includes:

  • Promptly responding to inquiries.
  • Addressing complaints in a timely and professional manner.
  • Going above and beyond to exceed expectations.

Investing in customer service training for your team can also help improve their skills and enable them to deliver exceptional service.

#9 The Pitfalls of Hiring the Wrong People

Hiring the wrong people can have significant negative consequences for your small business. For example, limited resources, a small network, or a lack of hiring skills can make it challenging to find the right talent, leading to decreased work productivity, low employee morale, and lower employee retention rates.

Solution: If you’re not confident in your hiring abilities, consider bringing an HR manager on board. They can help you identify the right candidates who are eager to learn and are a good fit for your company culture.

Pro tip: Ensure that you focus on employee retention after hiring by offering competitive compensation, providing opportunities for growth and development, and creating a positive work culture. Retaining good employees is just as important as hiring the right people.

Fear of Business Failure

#10 Fear of Failure in Business

It’s natural to be afraid of failure in business, but letting that fear control you can hinder your growth potential. Being overly cautious and avoiding risks can prevent you from taking advantage of new opportunities and stifle creativity and innovation.


  1. Instead of letting fear paralyze you, reframe it as a learning opportunity.
  2. Embrace your failures, and look for ways to learn from them and improve.
  3. Focus on your strengths and accomplishments to build confidence and maintain a positive mindset.
  4. Remember that failure is not the end; it’s an opportunity to start fresh and approach challenges in a new way.

Conclusion of reasons why small businesses fail

Growing a successful business is not easy, but it’s not impossible. With perseverance and implementing the solutions and tips provided in this article, you can overcome the obstacles that have caused other businesses to fail. Although success is not guaranteed, following the advice given can help you to tackle any challenge that comes your way. The end result is a sustainable business that can be built and scaled for years to come.

Looking to grow and manage your business with ease? Look no further! Our complete solution provides everything you need to start on the right track. So don’t wait any longer. Start your business today!

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