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Good news: Business failure statistics by the Small Business Administration show that new businesses are actually less likely to fail in their first year than previously thought. But that’s only possible when business owners avoid common business mistakes.
One of the best ways for an entrepreneur to learn how to succeed in starting their own business is to study what not to do. This guide covers the top reasons why some businesses fail and how to learn from their mistakes.
Top 9 Reasons for Business Failures
Here are nine of the most common reasons that businesses fail today. This isn’t an exhaustive list, of course, but here are some common ones that new business owners should look out for and avoid whenever possible.
Poor Leadership
Running any successful business takes strong leadership. And weak leadership is one of the most common reasons small businesses fail. A good leader needs to develop a strategic plan, hire the right people to help them implement that plan, delegate well, and adapt to changes that arise in the market.
Being the Same as Everyone Else
Even if a new owner decides to start a business in an industry that already has some companies serving it, it’s essential to stand out from the competition. After all, if the business is identical to every competitor in its sector, why would the customer base even consider switching to a new provider?
A good business model is one that differentiates itself somehow. For example, suppose a seamstress wants to open an alterations shop, and there are already several other businesses with the same service. To successfully build a client base and foster good cash flow, the business needs to stand out. Perhaps the seamstress could distinguish herself as a rush-order alterations service, or maybe her shop would specialize in men’s suits or wedding dresses. Even if general alterations are the bulk of her business, distinguishing her business with a unique focus can help her new business stand out.
Of course, standing out requires a business owner to run some market research to know what the unique needs are.
Not Writing (or Following) a Good Business Plan
Everyone has heard the old saying, “Failing to plan is planning to fail.” And that’s true in a business environment, too.
Yes, the initial business plan is important: making financial projections, conducting market research and competitor analysis, laying out the company goals, and more. But a good business plan adapts over time; a big part of small business management is taking time to adapt to changes to the plan. Too often, businesses fail because the business owner didn’t take time to regularly assess how the business was going and make adjustments when necessary.
Not Learning from Mistakes
Every human being makes mistakes in their lifetime. So naturally, a business, led by a human, is bound to make mistakes. But the risk of small business failure comes when the company (and the entrepreneur leading it) fails to learn from its missteps. A business that doesn’t learn from its mistakes is doomed to repeat those mistakes, perhaps to the point of extinction.
For example, a business owner might find themselves facing bad reviews around the holidays because their staff was too small to handle the influx of orders. Their reputation suffered, and they got to New Year’s Day completely burnt out because they handled all of the extra work themselves.
If they didn’t learn from that mistake, they might upset their customer base all over again the next year. Instead, a successful company leader might plan to hire five temporary staff members before the holidays to avoid the same issue happening again.
Insufficient Capital
There’s no avoiding the fact that a new business needs money to get up and running. And if a business doesn’t have enough startup capital, they could find themselves unable to get up and running.
Cash flow is absolutely essential for a new business, and prudent business owners will take time to ensure they’ve got enough funds in reserve to carry the business through the lean times. For some businesses, that means having a fair amount of cash on hand; it often takes a few years for a small business to break even.
Many business owners will contribute their own funds to the business, get a loan, or bring in investors to help them have sufficient capital for their startup efforts.
Lack of Customer Centricity
Any company can say that its customers are their number one priority. But how many businesses actually uphold that belief in their practices. Many so-called “customer centric” firms ignore their customers’ concerns or requests for new products, or maybe they ignore buying trends (and have frequent backorders on a popular product as a result).
Similarly, some business owners choose to “bury their head” in the proverbial sand and ignore negative customer reviews. Some don’t even read them. That’s a mistake; even negative reviews have a gold nugget buried in them: an opportunity for the business to “course correct” and fix the problem that made that person leave a negative review.
Poor Management of Finances
At any given moment, a business owner should have some clue about what their finances look like. Is the business generating profit? What are projected monthly sales? Daily sales? What are the monthly expenses? Does the business expect any upcoming changes to those expense or income rates?
Every industry is a little different; some business owners might need to check their financials daily, while others can get by reviewing them weekly or even monthly (especially for small side hustles). But what’s crucial is that the business owner has a picture of where their financials stand so they can manage their cash flow responsibly. It’s a little like taking the company’s pulse: if the financials are running strong, then it’s business as usual, but if the financials are weak (or that pulse is nonexistent), then it’s time to make some changes.
Not Generating Profit
Business profit isn’t a luxury; it’s a necessity. Granted, many businesses take a year or two to turn a profit with their product or service. But if a business is perpetually failing to make a profit, then it’s going to fail.
How much of a profit margin is necessary for success will vary from business to business. But what’s essential is that the business owner takes time to watch their profit margin very carefully. That way, the entrepreneur can know how to price their product or service competitively without cutting into their profits. They can also analyze their sales and expenses regularly to double-check that there aren’t any issues compromising that profitability.
Too Much Entrepreneurial Pride
Being an entrepreneur is great. Entrepreneurs helped build the U.S. into the diverse economy that it is, and every day, entrepreneurs are designing new products that make life better for everyone.
Lots of entrepreneurs love to “go it alone.” They put in the work and build the business from the ground up, driven forward by the great idea they concocted.
That independence is admirable, but it can come at a cost: some entrepreneurs neglect to ask for help when they need it. Too many entrepreneurs fall into the trap of only trusting their own judgment for every business decision. For example, suppose a restaurant owner redesigned their whole dining room, menu, and signage, and customers loved it. That ought to be a good sign for the business, right?
But what if the owner suddenly reverted to the old menu designs and restaurant layout because they came up with the original design and thought it was better? That could spell the ruin of the business because the entrepreneur didn’t rely on the expertise of other professionals (and wasted a lot of money in the process).
Conclusion
These are just a few common mistakes that can lead to small business failure. The smart entrepreneur will do everything in their power to avoid them.
But the smartest business owner also recognizes that no two businesses (or business owners) are created equal. What’s easy for one business could be a massive challenge for another. That’s why every business owner needs to stay alert to changes in the market, know their customers, and adapt, adapt, adapt.
Good luck out there!
