Top Reasons Small Businesses Fail (and How Yours Can Be Different!)

Understanding the top reasons small businesses fail can help small business owners mitigate the risks and reduce anxiety around their small business failing. Small business owners should take steps to support the growth of their companies and understand business scaling. Learn why over 50% of small businesses fail in the first five years and how to avoid common mistakes.

Reasons Small Businesses Fail

A small business owner faces many challenges in seeking success for their business. It can be overwhelming to consider the many areas failure can cripple a small business. Looking at common trends among small businesses and business owners can help simplify the overwhelming feeling. 

Simply researching the causes of business failure, a business owner is already taking steps to avoid the fate. Frequently identified reasons small businesses fail include an unwillingness to learn, lack of organization, professional isolation, cash flow problems, ineffective marketing and sales efforts, and a failure to understand their customers' needs and wants. 

Why Do Small Businesses Fail?

There are societal beliefs and pressures that small business owners must continually overcome when organizing and overseeing their business operations. Frequently glorified success stories in the United States depict an individual that has beat all odds on their own through sheer determination and wit. Reality paints a much different picture of the success stories of small businesses. Obstacles are inevitable– perseverance and smarts will serve a business owner well, but the recipe for success requires more.

Trying to tackle issues alone is a sure-fire way to find failure. Becoming the often-celebrated lone wolf is not something a business owner should attempt to achieve. Everyone needs help, outside perspective, guidance, mentorship, and the like to avoid becoming the owner of a failing business. Finding the best assistance, employees, and coaches and allowing them to do their jobs without over-managing is a skill that doesn't often come naturally. It is, however, a skill that one can learn with practice.

Causes of Business Failure for Small Businesses

The causes of business failure vary depending on the type of business, size, and business owner experience. However, commonalities exist among small businesses that may expose potential vulnerabilities to a business failure. Failing to scale their business, making financial blunders, organizational issues, and an unwillingness to learn are some of the top reasons small businesses fail.

"Why do small businesses fail?" is a question that requires further examination to understand what actions to take to avoid common mistakes. Here is where we will discuss the top reasons small businesses fail.

Reason #1: Failure to Scale

Getting a business on its feet is only the first hurdle that small business owners face. Maintaining a scalable business plan will ensure that the growing business can withstand expansion, weather setbacks, and do so smoothly. A scalable business can sustain growth efficiently and employs an effective strategy in the allocation of resources. 

In contrast, a business that fails to scale cannot withstand growth. This challenge to entrepreneurs may come in the form of poor leadership skills, choosing to remain loyal to partnerships that are no longer beneficial, ignoring the input of valuable employees, lacking big-picture thinking, and attempting to reach goals without outside help. Even one of these mistakes could prove disastrous to any other otherwise successful efforts that a business owner is making to benefit their business. Business growth is fuel for the fire that sparks when a business is in its infancy. Without fuel, the fire eventually burns out and dies– just as a business without growth eventually runs through its resources and fails.

To avoid the failure to scale a business, business owners must strive to balance the resources they already have at their disposal while gauging when to seek out new sources of revenue, new additions to their team, and reevaluations of their business goals. 

Reason #2: Financial Blunders

Financial goals are frequently the top-level goals that drive all other goals in a small business. A small business owner who has a clear financial plan can take calculated steps to avoid business failure and achieve financial goals. Successful small businesses obtain professional help with accounting, track progress by analyzing data, plan for unexpected expenses, and prioritize cash flow.

Comparatively, small businesses that fail to manage the financial health of their business have an uphill battle to success and are far more likely to fail. Cash flow problems are one of the most common reasons small businesses fail. Additionally, underestimating overhead costs, neglecting to save enough for taxes, mismanaging marketing efforts, and overspending on unnecessary expenses are major financial blunders that can cause small business failure. Failing to understand the target customer can also lead to financial mistakes. When the desires and needs of the customer are not understood, mistakes in inventory management and missed opportunities to offer specific services lead to reduced cash flow potential.

Bypass common financial blunders by seeking the most helpful professional support, planning for both expected and unexpected expenses, and maximizing cash flow. 

Reason #3: Organizational Issues

For purposes of this discussion, the organization of a business is threefold. Organization refers to the actual business structure, the internal management organization, and the organizational systems that keep a business running smoothly. In each area, a calculated approach to the organization can save money, acquire and retain valuable employees, and avoid errors that can cost money and the loyalty of valuable customers. 

Choosing between a sole proprietorship, partnership, LLC, or corporation largely depends on the type and size of a business. Choosing the wrong structure can cause headaches where liability and taxes are involved. 

The managerial organization may be the most important aspect of the organization of a small business. Defining values and setting goals as a company, then hiring the management and staff that align with those values creates a work environment that is more enjoyable and productive. However, a mistake small business owners may make in managing their organization is over-prioritizing productivity. Failing to value and engage individual employees, scheduling unnecessary time-consuming meetings, and failing to encourage a healthy work-life balance can quickly lead to employee burnout. These are costly mistakes that lead to high employee turnover. Another grave mistake small business owners make that can lead to business failure is the inability to delegate tasks to their trusted managers and staff. When small business owners fail to make work-life balance a priority for themselves and attempt to manage everything on their own, it leaves their employees feeling a lack of trust, undervalued, and unfulfilled. 

When the systems of organization in place that keep a business running aren't optimized, the result can be a chaotic web of mistakes that cost time and money. Lacking adequate organization systems for accounting, payroll, inventory management, etcetera, leads to stress and confusion for the business owner and the business staff.

Taking time to create an adequate business plan that includes all elements of a business organization can help avoid these mistakes that may lead to business failure. A small business owner possessing awareness to prioritize employee engagement through clear values and goals is much more likely to succeed.

Reason #4: Unwillingness to Learn

An effective small business owner invests in learning. They take time to improve themselves, address bad habits that negatively impact their business, and recognize that they can always learn something from anyone they encounter. The most effective small business leaders seek outside help for guidance, advice, mentorship, and coaching to identify the areas they need to improve. 

When small business owners are unwilling to learn, they can miss out on innovations that would allow them to be more competitive within their industry. Rigidity in leadership closes them off to new ideas and inhibits growth. It is another way that leads employees to feel undervalued when their input is neither welcomed nor heard. Small business owners who work in isolation and believe themselves to be experts in all areas of their business shut themselves off from valuable connections that can help them avoid fatal errors in business. 

Mistakes inevitably happen in business and life. When small business owners are unwilling to learn from those mistakes, the result can be one of the causes of business failure. 

How to Avoid Small Business Failure

Understanding the top reasons that small businesses fail is the first step to avoiding small business failure. Action from that understanding is the next important step. Goal-setting, creating a scalable business prepared for growth, financial and business planning, outside expert guidance, and a commitment to learning are focus areas for small business owners to avoid failure. 

Another important ingredient in scaling a business is investing time each week working “on” the business as compared to always working “in” it. Working “on” the business means small business owners secure uninterrupted time away from their business in strategic thought and planning. They consider the growth opportunities in their view and how to maximize them. They focus on the retention of key team members and how to make their business more efficient. Lastly, they invest in their own growth with the positive input of their coach, by reading articles, or listening to podcasts. These best practices have unlimited potential for advancement. 

Business success isn't just financial. Failure isn't financial alone either. Defining the elements of success that are most important to a business owner and seeking the help of other experts who have succeeded in those areas is a commitment that sets successful businesses apart from those that fail. Avoiding business failure requires attention, evaluation, and action. Fear of failure can leave a small business owner stuck in the cycle of common mistakes that lead to business failure. Addressing that fear with the help of outside experts is necessary to becoming an effective business leader. 

Build a Thriving Small Business with Coachwell!

Seeking expert help outside your business should not be avoided. Coachwell's team of business coaching experts has the experience and expertise to identify your business's unique challenges and needs and, most importantly, steps to take to address those challenges. 

Join the group of small businesses that have become success stories with the help of Coachwell. Coachwell's holistic approach to business coaching helps small business owners avoid failure and achieve a balanced and thriving business, whether the goal is to increase scalability, growth, or to prepare for selling.