According to the U.S. Small Business Administration, over 80% of small businesses fail* in the first year and 95% fail within the first five years.
That number might be surprisingly high to you, especially considering the commonly-held belief that most businesses fail within the first year. However, from there the number falls sharply. Only about half of small businesses survive passed the five-year mark, ranging from 45.4% to 51% depending on the year the business was started.
Beyond that, only about one in three small businesses get to the 10-year mark and live to tell the tale.
All this might sound discouraging. But, by identifying the primary causes of small business failure, adjustments can be made to allow you to place the odds in your favor.
Why do Small Businesses Fail?
Based on our experience working with small business owners since 2009 and backed up by statistical data, here are reasons small businesses fail.
Insufficient capital (money). The math just doesn’t work. If you don’t have enough cash to carry you through the first six months or so before the business starts making money, your prospects for success are not good. Consider both business and personal living expenses when determining how much cash you will need for investment in the business (employees, equipment, marketing, etc.) and also be prepared for a “business emergency”, i.e., theft, natural disasters or a similar competitor who sets up within close proximity. Additionally, you may feel like you cannot afford to give your customers something free or at a discount. But in reality, you can’t afford not to.
Believing you can do everything yourself. One of the biggest challenges for small business owners is to let go. Let go of the attitude that you must have hands-on control of all aspects of your business. Let go of the belief that only you can make decisions. Concentrate on the most important problems or issues facing your business. Sometimes, you can even tell these owners the problem, and they will recognize that you are right — but continue to make the same mistakes over and over. Let others help you out. Give trusted advisors responsibility and authority.
Failure to clearly define and understand your market, your customers, and your customers’ buying habits. Who are your customers? You should be able to clearly identify them in one or two sentences. How are you going to reach them? Is your product or service seasonal? What will you do in the off-season? How loyal are your potential customers to their current supplier? Do customers keep coming back or do they just purchase from you one time? Does it take a long time to close a sale or are your customers more driven by impulse buying? .
Failure to anticipate or react to competition, technology, or other changes in the marketplace. It is dangerous to assume that what you have done in the past will always work. Challenge the factors that led to your success. Do you still do things the same way despite new market demands and changing times? What is your competition doing differently? What new technology is available? Be open to new ideas like social media (Facebook and Instagram); online tools (website, EZ-texting and Geo-Fencing) and the explosion in the use of smart devices (phones, tablets). Experiment. Those who fail to invest in the new tools to attract and retain customers end up becoming pawns to those who do.
Marketing Mishaps. Business owners often fail to prepare for the marketing needs of a company in terms of capital required, prospect reach and accurate conversion ratio projections. When companies underestimate the total cost of early marketing campaigns, it is often difficult to secure financing or redirect capital from other business departments to make up for the shortfall. Because marketing is a crucial aspect of any early-stage business, it is necessary for companies to ensure they have established realistic budgets for current and future marketing needs..
“In life, you may have forgiving friends and relatives, but entrepreneurship is rarely forgiving. Eventually, everything shows up in the soup. If people don’t like the soup, employees stop working for you, and customers stop doing business with you. And that is why businesses fail”. — Jay Goltz owns five small businesses in Chicago.
Additional Sources: Small Business Administration*, Forbes Magazine, Investopedia, Honolulu Magazine