What Are the Most Common Causes of Small Business Failure? Questions Startups Need to Ask.
Ask yourself these questions to avoid small business failure:
- How Is My Small Business Product or Service Different?
- Is My Business Suffering from Poor Leadership?
- Are There Signs of Poor Financial Management?
- Where Is My Business Located?
- Do I Listen to My Customers?
1. How Is My Small Business Product or Service Different?
What makes your product or service unique from that of your competitors? If you’re a startup selling the exact same product as a lot of other companies already out there, you need to find or create a point of difference. This could be anything, but it’s something that will give a customer pause before buying from the competition. Is a lower price possible for your customers? Perhaps free shipping? Is the product customizable but your competitors are not allowing for that? Consider what you can do to make your product stand out or to improve the customer experience. And whatever that difference is, be sure to get the word out. Over time, this could also increase loyalty to your brand.
2. Is My Business Suffering from Poor Leadership?
Nobody wants to hear the term ‘poor leadership’ but you should assess your managing skills as well as those of your senior team, at the beginning and throughout the life of your company. Your employees make up a big part of your resources and they will be looking to you to lead and lead well. If you or your managers lack the skills, it may be time for some courses in the subject. Or consider bringing in a consultant for a day or two to help train your team on the latest management techniques.
Effective management is more than just ‘style’ though. Are the people in your key positions knowledgeable enough in their area of expertise? Do they read the latest articles and keep up on industry news and trends? Are they making recommendations or considering a new strategy for their department based on what is going on in the industry?
3. Are There Signs of Poor Financial Management?
This is unfortunately a common one. A small business owner starts with the best of intentions, and perhaps accelerated growth or other factors suddenly result in a cash flow problem. But did he start with a proper business model that detailed the operations, revenue sources, products and financing for his small business? What kind of planning did he start with? Is there a 5-year business plan? How about 10 years, or 15? If not, then how can he properly prepare his small business for the future?
Maybe you have a proper plan but the finances are just not adding up and the reasons are unclear. That doesn’t necessarily mean theft or negligence, but it could mean the bookkeeping process just needs some updating.
Keep in mind that many small businesses take time to get off the ground, and that there are almost always unexpected expenses. Often a small business revenues will not meet expectations in the first year of operation, but the owners may understand through their business model that this growth will take some time. In other words, they know it will be a while before they see any real money. But they planned for it and have the funding to cover the expenses until sales and revenues pick up.
If you don’t have a background in accounting and don’t have the time to learn, consult an accountant at the outset. Get the proper advice or analysis so your small business is better set up for success. And consider not starting the business until you have the proper capital and processes in place, otherwise you’ll let your team down as well as yourself.
4. Where Is My Business Located?
Location. Location. Location. Perhaps not as serious a problem as it once was, due to online ordering, location is still very important depending on the type of small business you’re running. It can mean the difference between a successful business or a failure. Ever notice a business open and close quickly? Even ones that are part of a well recognized chain? Often that happens because it was in the wrong location.
Let’s say you open a small diner, but the business is struggling. Are you in a location that is not only high trafficked, but trafficked by the type of customers you’re looking for? Perhaps you own a business that sells high end clothing accessories. Sure, online orders are good but these are the types of accessories that a lot of people like to touch first (before they buy), such as wallets and watches, so there’s something to be said for foot traffic too. Is your location uptown when you should be downtown? Worse, are you downtown but a block off the main drag where nobody can see you?
5. Do I Listen to My Customers?
Ever bought a product from a company, had a problem, and the customer service was either non-existent or the staff just didn’t seem to care? Or maybe they just took way too long to respond to your email? What are the odds you would ever buy from that company again? Zero, right? Right.
Forbes reported in 2018 that poor customer service costs businesses 75 billion a year.
Ask yourself what is the customer service process for your company? Can a complaint or product issue be resolved quickly and efficiently for both the client and the employee handling the problem? Or does it take a long time? Does the employee know who to contact to resolve those big issues? Are the problems reported so that your managers can get an idea of what’s working and what’s not? Lastly, is there a way for customers to voice their suggestions?
Customers need to feel like they are being taken seriously, and that their business is valued. Each customer question needs a personal response. Ask yourself if your company is doing that, and if not, create a policy to do so.
Other Questions Related to What Are the Most Common Causes of Small Business Failure?
What Is the Failure Rate of Small Business?
We’ve all heard this statistic: 50% of all new small businesses fail within their first 12 months of operation. Wow. How could this disturbing percentage not give an entrepreneur pause? Simple. This number may no longer be true. In fact, maybe it never was.
Normally when looking at statistics, you need to consider the source, but even respectable research organizations disagree on the numbers when it comes to small business failure statistics. The United States’ SBA (Small Business Administration) data states that 66% of all new small businesses will survive those crucial first two years of business. However, Bloomberg says that percentage is actually less than 20%. Why the discrepancy? The reason is each study is using different criteria to determine the numbers.
Another factor for new entrepreneurs to consider is the field they are getting into, as success or failure rates vary between industry. According to the Census Bureau’s business dynamics statistics, if you are looking at starting a small business in a specialized industry, like mining or manufacturing, then your chances of becoming a small business success story are much higher than starting a new business in finance, insurance or real estate (51.3% for mining vs 39.6% for all the others).
Keep in mind that these stats don’t take into account your expertise, contacts and business savvy. All the research is saying is that these sectors tend to do better when it comes to five-year survival rates.
There are approximately 115 million small businesses in the world and over 28 million of them are in the United States.
How Can a Business Avoid Failure?
A business can avoid failure by making sure it has the proper people and tools in place at the outset. Maybe you have a great idea for a product, or you’ve discovered that magical hole in the market that nobody is filling. But do you know how to run a business? Do you know anything about manufacturing or distribution? How about marketing? If not, don’t give up. Just hire qualified people so you can focus on what you do best, providing that service or creating that product.
You then want to make sure that your managers have the proper tools to do their jobs. For instance, if your accounting department requires a special piece of software or technology that will reduce time spent inputting information and will also increase efficiency, then that’s something to consider.
Often top management is accused of being ‘out of touch’ with their company, its products and customers. You can avoid this mistake simply by scheduling regular status updates with your management team, individually, once a week. Have them go through a list of what’s taking up most of their time, the projects they’re working on and the latest developments. They will appreciate it because they can get your immediate feedback and move on. You will also have a better understanding of the challenges the company is currently facing.
How Do You Know a Startup Is Failing?
You can know a Startup is failing by simply looking for the signs:
- Expenses Exceed Revenue. If this is happening every month, then you know you have a problem with the company’s finances.
- Conflicting and Changing Direction from Management. Are the priorities of the company changing often, or seem to conflict with previous mandates? Is the senior team setting new priorities every week? Are there a lot of meetings where nothing seems to get resolved? This kind of inefficiency hints that there’s not a proper plan in place. The company needs to regroup and rethink its strategies, otherwise it’s just spinning its wheels.
- Your Product or Service Doesn’t Work as Advertised. Time and time again, the customers are complaining. This doesn’t have to be the end though. Focus on a solution, and on satisfying your current roster of customers so that they will return.