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Top 6 Reasons Small Businesses Fail

It's a sad and well-known fact that many small businesses are doomed to failure. In fact, according to one estimate, one-third of businesses fail within their first two years. That might be a generous estimate, though. Other statistics have said that up to 80 percent of small businesses fail within the first 18 months. However you look at it, the entrepreneurial lifestyle is not one for folks who are afraid of failure. No one wants to fail, of course, but you have to accept the possibility.

However, accepting the possibility doesn't mean that you're resigning to it. When you understand why so many small businesses fail, you're better equipped to protect your own business from that tragic fate. Here are six of the top reasons for small business failure.

Cash Flow Problems

Running out of money is at the heart of most small business failures. The more cash you have in your business at any given time, the more stable it is.

Businesses encounter cash flow problems when they don't manage their receivables well. If you lack a good system for keeping track of debtors or accepting payments, there may be a significant gap between when you render a service or sell a product to a consumer and when you get paid. This gap can mean that your reserve funds dry up and you're unable to keep up with your business's daily expenses.

Here are some things you can do to help out your business's cash flow:

  • Make payments on the last day they're due so you can retain funds for as long as possible.
  • Have clear due dates on the invoices you issue, and offer incentives to get consumers to pay what they owe as soon as possible. For example, you might offer a 10 percent discount if they pay right away and a 5 percent discount if they pay within the first week. Using invoicing software like Billing Orchard can get invoices paid much faster.

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  • Make it easy for customers to pay you via credit card, cash, mobile payments, or other methods.

Overconfidence

If your business gets off to a great start, you run the risk of becoming overconfident and complacent. You might convince yourself that because so many people seem to love what you offer, you don't need to put as much effort into promoting your business. You might raise prices, stop offering incentives, or cut back on marketing. These are missteps that give competitors a chance to jump in and take away your burgeoning success.

Not Enough Confidence

A lack of confidence is another issue that plagues many small businesses. You might try too hard to attract business by offering unrealistic deals that cut into your bottom line, or you might spend so much time apologizing to a few unhappy customers that you forget about the bigger picture. Furthermore, if you adopt the mindset that your business is bound to fail, you create a self-fulfilling prophecy.

Inadequate Marketing

Don't fool yourself into thinking that "if you build it, they will come." Attracting customers takes more than putting together a beautiful website or a gorgeous storefront. An article from Chron even went so far as to state, "The heart of your business success lies in its marketing."

Potential customers need to know what you sell and why they should come to you if they're interested in buying a product similar to what you offer. Without proper marketing, your business is just another face in the crowd.

At a minimum, effective marketing should accomplish these things:

  • Spread the word about your business and what it does.
  • Communicate your business's values. Are you most proud of your products, your customer service, or something else? Boast about what you do best.
  • Appeal to specific audiences. What demographics might be most interested in what you have to offer?

Create a marketing budget, and then look into platforms that will help you reach the most people. You might use social media, content marketing, newspaper and TV ads, or a combination of several marketing methods.

Insufficient Market for Your Product

For any business to succeed, it needs to offer something that appeals to people and is useful to them. As you're putting together your initial business plan, you need to seriously consider whether there is a market for what you want to sell. For example, a store that sells ski gear wouldn't be likely to succeed in Hawaii or another place where snow is borderline mythical.

Sometimes, it's tricky to tell before you open a business if what you offer will appeal to your community. You can conduct informal research by asking your friends and family if they think your idea might have success, but you should dig deeper. Look for statistics that indicate what people are buying and who is buying certain items.

If you've already started your business without doing thorough market research, you may still be able to salvage your operation by rolling out something new that will appeal to your target demographics.

A Poor Customer Experience

If customers are unhappy with any part of their interaction with your business, the chances are that you'll hear about it — and so will a lot of other people. This can ruin your reputation and send your business to the graveyard.

From the beginning, have a plan for making the customer experience as pleasant as possible. If you're operating a brick-and-mortar business, have standards of cleanliness and order that will make it easy to shop in your store. Train your employees to always be friendly and tactful even when they're dealing with cantankerous people, and have policies in place that will allow employees to appease unhappy customers.

If your business is purely online, you should still offer great service. You can do this through email or instant messaging. You should also make sure your website is easy to navigate and understand. Enlisting the help of a professional web designer is a smart move. Check out some of the websites that Payscape has created for our clients.

Issue surveys to your customers so you know if you're on the right track.

You're to be congratulated on your intrepid entrepreneurial spirit. Starting a business is always a risk, but the things you'll learn and the experience you'll gain will be invaluable to you regardless of whether your business takes off like a rocket or sinks like a stone. But to avoid sinking, you should keep in mind the reasons businesses fail.