The Bureau of Labor Statistics indicates that 20.6 percent of businesses fail by year two, 30.7 percent by year three, 38.1 percent by year four, and 43.7 percent by year five. Pride can often cause emotional decisions that can be detrimental to the company’s success. But it is more than just pride that causes a small business to fail. Entrepreneurs need to be wary of the reasons businesses close and learn how to avoid those types of situations.
1. Management Mistakes/Incompetence
No one wants to admit they made mistakes, but entrepreneurs need to be honest with themselves if their businesses are going to survive. Incompetence is one of the most common reasons small businesses fail, and much of it comes down to pride and bad decisions.
Starting your own business to make a lot of money or make your own schedule are two of the biggest reasons small businesses fail. If you do not have a passion for your business and are not prepared to face the failures that will occur, you will have a hard time navigating your business through its first few years.
2. Uncontrolled Growth
Many entrepreneurs get into the business world without understanding that controlled and planned growth is a healthy way of doing business.
Can you scale your products and services at a profit to meet demand? An entrepreneur who develops a product or service at a smaller scale can often find it difficult to envision that product or service being sold through multiple locations to a larger audience. Issues such as ongoing production needs and delivery requirements to customers must be scaled properly to avoid rising costs as your business grows.
3. Inadequate Financing
Business funding is one of the most important aspects of small business success, yet too many entrepreneurs take business financing for granted. You need to have a strong grasp on your financing options if you want your business to be a long-term success.
It can be extremely difficult to run a successful small business without a sound business plan. Within a good business plan are several elements of business financing that include standard operations, expansion costs, and crisis financing. When you plan your funding in advance, you know where to look when you need capital to keep your business going.
4. Lack of Adequate Cash Flow
As a small business owner, you need to be aware of how much cash you have on hand at all times, and how much cash you can expect to come into your business tomorrow. A good cash flow is the lifeblood of your business, and without cash flow your business will suffer.
How healthy is your accounts receivable ledger? Do you have strict guidelines for offering customers credit, or are you unsure as to when you can expect your next customer payment? When incoming revenue is both unknown and mismanaged, it can create cash flow problems.
Do you plan your vendor payments, or do you pay bills whenever you get the cash? The truth is that if you don’t know your cash flow, your ability to manage outgoing expenses can be impossible. If you don’t keep a close tab on your outgoing expenses, your cash can dry up quickly.
5. Poor Business Planning
Every successful small business starts with a plan. Poor business planning is another one of the key reasons why so many small businesses fail.
Your business plan is the document you turn to when you need to make important business decisions. If that plan does not exist, then it can be difficult to make decisions that are consistent with your company’s future plans.
Also, the needs of your company fluctuate day-to-day, which means operating your business with monthly statements is going to cause problems. If you try to manage day-to-day operations based on monthly income and expense figures, then you will find it difficult to plan vendor payments and meet your daily obligations.
When you understand the primary reasons why small businesses fail, then you can take the steps necessary to combat those issues. Your small business is your passion and your dream, and it is the way you have chosen to provide for your family. Most small businesses fail for reasons that could have been avoided. When you take the time to plan out your business and monitor your day-to-day operations closely, you can avoid the common mistakes other entrepreneurs make.