June 20, 2024
Hexavia Business Club

Business Failure: 10 Common Reasons why Small Businesses Fail and how to avoid it

Business Failures

Everyone in one way or the other has failed but that doesn’t, mean they can’t succeed. This applies to business too. 85% of businesses fail in their first year, 10% of other business failures occur in the first three years, and 4% within their first 5years. The remaining 1% also failed too but what differentiated them was that they didn’t quit. They have mastered the ability to navigate business failures. Strong businesses are not businesses that haven’t failed but businesses that maximize their failure points to success. This is exactly what Google has been doing to the point of becoming the market leader today for search engines. This article is not about how not to fail but how to fail-safe successfully. How can you manage business failures? Let’s go over this fact, as well as some other small business failure statistics and rates you should be aware of.

What is a Business Failure?

A business failure is described as a company that shuts down or ceases operations, causing creditors to lose money. When a company can no longer turn a profit, it is said to have failed. It is not considered a business loss if the principal owner leaves a business, whether due to death or retirement, but does not leave the business with any debts

Reasons for Small Business Failures

With this knowledge in mind, we’ve compiled a list of the top ten reasons for small business failures:

#1. Inability to comprehend the business and clients.

We always ask our clients, “Where are you going to play, and how are you going to win?” ”. To summarize, it is important to consider your competitive market space as well as your consumers’ purchasing behaviors. So, answering questions about your clients and how much they’re willing to pay is a big step toward putting your best foot forward.

#2. Starting a company in an unprofitable market.

Also, the best ideas cannot always be transformed into a profitable enterprise. It is critical to select an industry in which you can achieve long-term growth. So, we all learned the dot-com lesson: you need positive cash flow to live. To remain in company, you need more than a good idea and a lot of enthusiasm.

#3. Inability to comprehend and articulate what you are offering.

Your value proposition must be clearly defined. What is the benefit I give to my customer? Once you’ve grasped it, consider whether you’re expressing it effectively. Does your target audience understand what you’re saying?

#4. Inadequate funding

Businesses need cash flow to keep them afloat during revenue cycles and the normal ebb and flow of business. A big portion of company loss can be attributed to running out of funds in bank accounts. Cash is king, and many people soon discover that borrowing money from lenders is difficult.

#5. Reactionary views.

Failure to predict or react to changes in competition, technology, or the marketplace can put a company in jeopardy. So, keeping your company successful requires you to be creative and aware.

#6. There is no consumer strategy.

Be mindful of how your customers affect your company. So, do you have any contact with them? So, do you have any idea what they like or hate about you? Understanding the customer from the inside out will help you build a winning plan.

#7. Not knowing when to say “No.”

To provide excellent service to your clients, you must prioritize consistency, delivery, follow-through, and follow-up. Going for any piece of business you can get drains your cash and reduces your overall profitability. It’s okay to say no to ventures or companies so you can concentrate on quality rather than quantity.

#8. Having an undue reliance on a single client.

Would your company be okay if the most important customer walked out the door and never returned? If the response is no, you may want to make diversifying your customer base a strategic goal in your business plan.

#9. Management failure.

A business’s management entails many tasks, including planning, coordinating, managing, directing, and communicating. So, the golden rule in small business management is to always know where you are. Growing beyond management resources or expertise is a common issue for successful businesses.

#10. There was no forethought.

According to the adage, failing to prepare is planning to fail. You will never arrive if you do not know where you are going. A systematic approach enables you to foster commitment, alignment, and ownership within your organization. It’s a straightforward map that shows you where you’ve been, where you are, and where you’re going next.

How to Prevent Business Failures

You can take a few steps you can take to save your company from collapsing.

Step 1

One of the most common mistakes that business owners make is failing to seek advice from other experts in their industry. Even if you believe you know everything there is to know about your industry, there is almost certainly someone with more experience than you. So, you should make contact with other professionals. Seek guidance if your company isn’t succeeding in the way you want or need it to.

Step 2

Another smart way to prevent company loss is to prioritize customer service. It would be much easier to grow your company if you take customer service seriously. On the other hand, if you do not pay attention to and value your clients, you will most likely lose them to your rivals. Maintain open lines of communication with your customers and show that you care for their needs. Also, you should be able to keep your company running smoothly.

Step 3

Staying true to your business’s vision will also help you avoid disappointment. You should avoid imitating other companies and what worked for one might not work for another. While certain ideas will work for all businesses, you can only emulate another business if you are certain that what you are copying will work for yours.

Step 4

Putting a premium on experience will also help the business thrive. For example, if you lack the management expertise, you might want to employ someone to assist you with these responsibilities. Inexperience can quickly lead to the failure of a company, so make sure you’re getting the help you need.

Read Also; Structure and Business Systemization Broken Down

What Is the Failure Rate of Small Businesses?

According to data from the Bureau of Labor Statistics, approximately 20% of small businesses fail in their first year, and approximately 50% fail in their fifth year. However, it is also useful to see these statistics in terms of American small business survival rate rather than failure. The survival rate is as follows, according to the Bureau of Labor Statistics Business Employment Dynamics:

  • Approximately 80% of companies with workers can survive their first year in operation. (According to the most recent results, 79.8 percent of small businesses that opened in March 2016 survived to March 2017.)
  • Approximately 70% of companies with workers can survive their second year in operation. (According to recent reports, 69.2 percent of small businesses that opened in March 2015 survived to March 2017.)
  • Approximately half of all companies with workers will survive their fifth year in operation. (So, according to data, 50.2 percent of small businesses that opened in March 2012 survived to March 2017.)
  • Around 30% of companies will survive their tenth year of operation. (According to the most recent results, 33 percent of small businesses that opened in March 2007 survived to March 2017.)

However, the quotable statistics of failure that you need is that approximately 20% of small businesses fail in their first year, and 50% of small businesses fail in their fifth year. And these concentrations have remained constant over time. Surprisingly, this means that year-over-year economic conditions have little effect on how many U.S. small businesses survive. Hence, the takeaway here is that you can pretty much bank on an 80 percent, 70 percent, 50 percent, and 30 percent survival rate across one, two, five, and ten years of business—regardless of the year.

The Good News About Small Business Failure Statistics

If you look at the rate of small business failures, it will seem that the US small business sector is absolutely doomed. However, several reports indicate that small business in the United States is thriving. So, if you’re feeling pessimistic about starting a small company, consider these five facts.

#1. Women-owned small businesses are expanding and thriving.

According to an American Express survey, female entrepreneurship increased by 114% between 1997 and 2017. We still have a long way to go before gender equality in the entrepreneurial space, but the fact that women-owned businesses consistently outlast male-owned businesses shows the power and perseverance of female entrepreneurs.

#2. Minority-Owned Small Businesses are  growing in number

There is also good news for minority-owned small companies. According to a report conducted by the Minority Business Development Agency, the number of minority-owned businesses in the United States grew by 38% between 2007 and 2016.

Again, there is plenty of space for these figures to rise, but it is promising to see increased diversity among US small business owners.

#3. Small businesses account for a large portion of the economy.

You should be proud as a small business owner that you and your fellow entrepreneurs account for the majority of the economy. However, several figures demonstrate the significance of small businesses in the United States.
Small companies in the United States include:

  • 99.9 percent of all businesses in the nation.
  • 99.7% of all businesses with paying workers.
  • 97.7 percent of all exporting companies
  • Forty-eight percent of private-sector jobs.
  • Payroll in the private sector accounts for 41.2 percent of total payroll.
  • 33.6 percent of the total known export value

#4. Small companies account for the majority of job growth in the United States.

If you run a company and handle staff, then you’re in part responsible for these astounding job creation figures:

  • In 2013, small businesses employed 56.8 million individuals or 48 percent of the private workforce.
  • Small companies added 1.4 million new jobs in the first three fiscal quarters of 2014, with very small businesses (fewer than 50 employees) accounting for 39% of the total.
  • Small businesses account for 63% of net new job creation in the United States.

#5. Small businesses’ survival is at a faster rate than their failure.

Finally, a few small business figures suggest a bright spot in the small business market: small businesses are opening at a faster pace than they are closed for the first time since the recession. This bodes well for job growth in the United States as well.

The Big Picture: Failure Rates of Small Businesses

When you step back from these small business failure statistics and look at the big picture, the biggest lesson is this: running a small business is difficult work—and the number of small businesses that fail just proves it. There are many reasons why small businesses struggle, but in general, keep an eye on the capital sources and cash flow—these are often the deciding factors in business failure.

Most of us would like to stop discussing failure. Ignoring clear (and subtle) signs of business trouble, on the other hand, is a surefire way to end up on the wrong side of business survival statistics.
According to the business failure statistics, approximately 66 percent of new companies live for two years or longer, 50 percent survive for at least four years, and only 40 percent survive for six years or more. This is according to the U.S. Small Business Administration’s report “Redefining Small Business Success.”

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