Why small businesses fail and how to avoid it

If you run, or are thinking of starting, a small business you may be wondering what pitfalls to avoid. Here are some common reasons for business failure and strategies you can use to avoid them.

Failure is a double-edged sword

Failure is an invaluable learning tool that provides the experience needed to make wiser decisions. Knowing where you, or others, have gone wrong in the past is hugely beneficial in helping you navigate the same path in the future. Of course, no one starts a business with the aim of not being successful. Minimizing failure, where possible, is always preferred. Unfortunately, this is easier said than done and 90% of startups do fail. Small business failure is a constant threat throughout the first few years of its conception, but surprisingly, that threat doesn’t go away after the first year, or even deplete as they pass by:

  • 20% of businesses fail in the first two years
  • 45% of businesses fail in the first five years
  • 65% of businesses fail in the first ten years

In fact, only a quarter of startups are estimated to evade small business failure and make it year 15. That may seem alarming, but you’re also sure to notice that it hasn’t stopped ambitious entrepreneurs from trying. In 2019, there were over 770,000 startups in the United States that were less than a year old, an increase on the 733,490 recorded in 2017. For those that make it, success can be major. However, even for the more modest ventures, the achievement of setting up a business will be a merited source of pride and joy. Making a tangible business entity from what was once just an idea requires a boldness and dedication that signals success in its own right. This shouldn’t be overlooked.

2020 brought with it an economic catastrophe that no one could have predicted. While the future remains a source of uncertainty, estimates for next year suggest there may be tough times ahead for almost half of small businesses if economic conditions don’t improve. However, small businesses have also proven able to be more responsive to change than their larger counterparts, with entrepreneurs jumping on the opportunities offered by the pandemic to forge new business—demonstrating the key traits a truly tenacious small business needs

What causes small business failure?

So, why do some small businesses fail while others succeed? What can you do to make sure that fate is kind to your business? Here are some hazards that can stop startups from making it past their first few years:

Poor execution

If you’re going to do something, do it well. Before you even think about clocking in on day one of your new venture, make sure you have everything you need to make it a viable business. That means keeping up with changes in small business administration. There is a certain standard expected on start-ups, to be fully up to date on the best and most efficient ways of working. That means you need to have the slickest workflows and the best tools at your disposal, because with so much on the line, you’re going to need them. Make sure Dropbox is among your arsenal, and join small businesses like Valiant that have boosted their productivity, who say, “because of Dropbox Business, we've managed to successfully deliver files to our printer every week since we started publication.”

Poor market research

No matter how great you think your business idea is, it won’t get very far if people don’t want it. And not knowing what people want is a common reason for new business failure. Successful businesses find a gap in the market and fill it. We aren’t saying all your ideas need to be radical, but you should fulfill a demand. It’s not easy to bring a service or product to the market, so if you’re willing to invest all that time, effort, and money, make sure you don’t fall at the first hurdle. Of course, there are exceptions to the rule, but for most young businesses, it is by far the better option to find a demand and answer it than try to generate interest in a saturated market.

No business plans

Everyone needs a plan in life and if you intend to start a business then a plan is more important than ever. You need a strong business plan to act as more than just a roadmap. It will help draw investors, secure loans, and attract top talent. Going into business without a strong, well-thought out business plan often spells failure.

Here’s what to include in a business plan:

Executive summary: This is basically your elevator pitch. Specify what your business will do, how you will do it, who your executive team is, and where you will operate from.

Company description: Say what your company will do and what demand or problems your product or service will be solving. Describe your manufacturing process, or the consumers you intend to service. Include things like the legal structure and expenses of your business here.

Research: A strong business plan is backed by research, and this is where you need to outline it all. Include your market analysis and your intended strategy including forecasts and milestones. Compare yourself to competition and outline how you believe your business has the advantage. You can include customer testimonials if you like.

Management: Good management is key to any company. Mention here what sort of company you intend to be, your business model, whether that’s a limited partnership, or if you plan to be a sole proprietor. Create an organizational chart to show who the key decision makers are, you might also want to include their resumes.

Marketing: Describe how you plan to gain and retain customers and your overall brand creation and management.

Finances: The big one. Here is where you need to have a financial forecast, cash flow statement, and balance sheet. You should aim for long-term projections of around five years, to show how you plan to keep the company stable and on track to business success.

Your business plan shouldn’t be a secret, either. Your team should always be able to refer to it. It should be the cornerstone of your business’ source of truth, and shared with every member of your team.

Not enough team spirit

Startups aren’t easy. You’ll often see job vacancies forewarn you of “startup culture.” That may mean starting salaries are low, hours are high, and you’ll be expected to do a lot more than your job title implies. That’s simply the nature of small businesses, where pushing for greatness is innate in everything you do as a team. And you absolutely must be a team. If anyone thinks “that’s not my job” or even the CEO thinks they’re only there to be business owners, and not get stuck in with day to day tasks, failure is sure to follow. Successful entrepreneurship isn’t about sitting in corner offices and letting others work. You must foster a company culture where everyone not only pitches in, but everyone matters.

centralized workspace ensures you’re all on the same page, without work silos getting in your way. You’ll often see startups be led not by one CEO but by co-founders, proving that the need to share the load and bounce ideas off each other is fundamental to the business.

Not enough money and too many dreams

The obvious one. There are fantastic tales of successful entrepreneurs lifting their boot-strapped businesses, but at the end of the day, money is the be-all and end-all of any company. Small business owners need to be sensible and think of business survival first and foremost. Do not be swayed by delusions of grandeur. Sure, a modern office in a central location might motivate your team, but do you need it? Maybe taking on more staff might lessen the load on your current staff, but can you really afford it? Business failure isn’t something anyone wants, but it should be a sort of guiding light to stop you from investing in the unnecessary. If you fail, you’ll still need to pay back all the money you borrowed trying to realize your (perhaps unrealistic) vision.

Consider instead the core values of any team, like the ability to work together seamlessly. Think of work as an overall experience, and you’ll find much more worthy investments than mere things like a shinier, pricier office space.

Poor presence

You might have the best business in the world, with a product you know people need and all the market analysis to back it up. But it means nothing if people don’t know where to find you. While this issue isn’t quite as intimidating as studying the numbers and forecasting your finances, it’s a common problem, perhaps because it’s so easily overlooked. Maybe you’ve been looking for a new premises, found one that just “felt right” and moved your team in right away. Unfortunately, gut-feelings aren’t very accurate business metrics. Bad locations can immediately spell business failure, but a bad internet presence can do very much the same thing. Online channels cannot be underestimated. It’s not just about having an online shop, it’s about engaging with customers and growing your customer base through social media and other omnichannel strategies. The days when having just an address in a business directory is long gone, nowadays your business needs to be open 24/7 on dozens of channels at once.

Not moving with the times

Startups need to grow, and you won’t achieve growth if you don’t adapt. Yes, you might have answered a much-needed demand, but chances are your upward trajectory won’t last forever. Sooner or later you’ll start to plateau, and other competitors are always entering the market. Uber is a great example, having expanded their business model to food delivery, couriers, and bicycle hire from its original cab services. It’s not just about knowing how to expand and discover new opportunities but understanding how to bounce back when things go wrong. Just take Valiant, who overcame the obstacle of natural disaster to keep pushing towards success; “Hurricane Sandy shut down the city but, thanks to Dropbox, our publishing proceeded without a hiccup. We didn't miss a ship date.” This also links back to the importance of team. Remember, collaboration is key.

It’s important to note that, sometimes, you can do everything right and still fail for reasons beyond your control. Failure is a description of an outcome and not an assessment of character. There have been plenty of startups that tried, failed, tried again, learning along the way until they finally succeed. As counterintuitive as it may seem, persistence, a willingness to adapt, and the ability to embrace and learn from failure are all integral parts of achieving your goals.

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