7 Common Reasons Why Small Businesses Fail

Chartered Marketing Institute

More than 28 million businesses in the United States operate with fewer than 500 employees, according to the Small Business Administration (SBA). Classified as "small businesses," they are the backbone of the nation's workforce.

Unfortunately, statistics show that more than half of all small businesses are forced to shut down in their first five years; by the 10th year, only 29% of them will remain afloat. As a small business owner, you can increase your chances of success by familiarizing yourself with the most common reasons for failure.

1) Insufficient Cash Flow

According to a study conducted by U.S. Banks, 82% of small businesses fail due to insufficient cash flow. All companies need positive cash flow to perform their respective operations. Without cash, you won't be able to cover expenses like overhead, inventory, and payroll.

Keep in mind that bank loans, lines of credit, and other debt-based capital aren't long-term solutions to insufficient cash flow. You must work to increase your business's revenue and lower its operating expenses. Only then will your cash flow improve.

2) Premature Expansion

Another common reason that small businesses fail is premature expansion. Some small business owners make the mistake of trying to scale their operations too early. If they're unprepared and not ready for this growth, it can cost the owner big bucks.

A retail store owner, for instance, may open a second location in hopes of doubling revenue. The first store's success, however, doesn't necessarily guarantee the same results in the second shop. The original site may continue to turn a profit, while the second one becomes a financial black hole.

3) Poor Accounting Practices

If you don't know how much money your business generates and how much it spends, how will you optimize it for success? Small business owners often neglect basic bookkeeping. They focus their time, money and resources on their business's operations, paying little-to-no attention to financial accounting. When tax time comes around, they're forced to rummage through a dozen shoeboxes in search of expense-related receipts.

4) Broad Selection of Products or Services

What's wrong with offering a broad selection of products or services? As mentioned above, there are 28 million plus small businesses in the United States. For prospects and customers to remember who you are, you need to differentiate your business from the rest. That means focusing on a smaller, more targeted selection of products or service, known as a niche.

When choosing a niche, consider the following:

•   Competition: How many other businesses are selling the same type of products or services?

•  Longevity: How long will interest and demand for the niche last?

•   Profitability: How profitable is the niche?

5) Getting Into Business for the Wrong Reasons

Entrepreneurs should consider their motivation for starting a small business. No one enjoys listening to a boss every day at work, for instance. Some entrepreneurs believe the solution to this problem is creating an enterprise where they can work for themselves instead of a boss.

The ability to work fewer hours is another common reason for starting a small business. Unfortunately, ideas such as these don't provide a blueprint for success. Turning a vision of a profitable business into a reality requires time, patience, hard work, and dedication -- and you'll probably still find yourself taking orders from someone, even if you don't have an employer.

6) Poor Marketing Strategy

A robust marketing strategy is a foundation upon which nearly all successful small businesses grow. Unlike larger, more established companies, small businesses typically aren't known by their target audience. Therefore, small business owners must advertise and promote their business.

An effective marketing strategy should consist of multiple channels, such as email, direct mail, search engines, and social media while focusing on the business's target audience.

Disclosure: There are some affiliate links within this post and I may receive commissions for purchases made through links in this post, but these are all products I highly recommend.

7) Choosing the Wrong Location

Finally, you must choose the right location for your small business. If it's not in or around your target demographic, you'll lose a substantial amount of sales. That applies to both business-to-consumer (B2C) and business-to-business (B2B) companies.

The accessibility (or inaccessibility) of a small business can affect its success. Are customers able to easily find your business? How bad is the traffic? Are there enough parking spots? You'll need to answer these questions when choosing a location for your small business.

Creating a successful small business isn't easy. If it were, the failure rate would be much lower. However, you can overcome the challenge by getting yourself in the right mindset. Stay positive while continuing to adapt and optimize your small business for success.

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