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Small Business Failure

Updated on February 10, 2014

Find Solutions to Problems

Minimize Small Business Failure

The following will include a list of 10 reasons why a small business may fail

Understanding the fact that many small business failures occur every year is a humbling thought for most entrepreneurs. Being able to create a successful business is the goal of all new business owners and by focusing on building a strong company foundation the chances for a positive outcome increase greatly. Success is measured based on a company’s sustainability and profitability. Businesses fail for many reasons. New entrepreneurs should avoid the following pitfalls in order to achieve success in business.

Lack of Planning

1. Lack of planning.

Like any other task or project, planning is a must to set things in perspective and forecast your company’s profitability in its initial year. A plan becomes your guide to measure how far or near you are to the goals of the business. More often than not, businesses fail because of this missing element. A business owner with no plan has no control of the business.

Poor Risk Management

2. Poor risk management

Setting up a new business involves taking risks. However, these risks can be managed to reduce their impact to the business. Before undertaking a business venture, the entrepreneur should take the time to research or conduct a feasibility study to determine the risks involved. Doing a thorough competitive analysis should be a part of an entrepreneurs process of deciding if starting a particular new business makes the right sense. The more information a new business owner has about the forces that can impact their business the more manageable potential risk becomes. It is the unknowns that often keep most small business owners awake at night and the factors that can harm a business greatly. Having the strong support of a business professional that understands proper risk management can really support an entrepreneur to focus on the most important item delivering a great product to customers.

Failing to protect your ideas through provisional patents or filing for regular patents to protect core products is a very risky thing for a start up to do. If another company infringes on your intellectual property and you have not taken the required steps to protect your ideas you are subject to loose your market advantage and not be fully rewarded to for your innovations. At least file a provisional patent for your basic idea and also don't forget to file your trademarks for your company name and any product names, having to re brand a company because of a trademark dispute can be detrimental to a start up company.

Lack Business Management

3. Inefficient and ineffective business management.

Most of the companies that failed cite this reason as a major cause. Most new entrepreneurs lack the expertise on business and management. They also encounter difficulties in important areas of the business like production, finance, marketing and recruitment of employees. Many new businesses are started by people that have been in the field i.e. engineers with a great idea starting a new tech company or the trained electrician that starts his own electrician business rather than work for another company. Both are very skilled at their profession, however the most successful understand they need to reach out to business, marketing, sales, accounting, etc. experts for support to scale and grow their business properly.

No Capital Sources

4. Lack of business capital

Entrepreneurs can find themselves on the brink of bankruptcy in the middle of business operations. The lack of funds can be fatal to the business because you will lose employees and customers for not giving what they need. Managing the financial aspect of the business is critical and often best to seek a trained accounting professional to assist in your accounting set up procedures and periodic check-ups. Reviewing which Angel investors, Venture Capitalists, or other sources of capital can be time consuming so be ready for the rigorous process of raising funds if that is the path your business needs to go down.

Overestimation of Profits

5. Overestimation of Profits

New entrepreneurs may have the tendency to overestimate profits then realize later on that the money coming in is not enough to cover business expenses. Keep costs down to help your business survive. Be realistic when making business projections and plan accordingly when planning for future employees it is ok to start in an executive suite office or flex space if your business type allows instead of renting your own space that is too big now, but hopefully you will grow into. Maybe even consider a business incubator in your local area that will provide you not only with the right solution for your early stage business from an office space perspective but also introductions to business leaders as well as investors. Many business incubators are now offering seed capital to the companies that they support which is an excellent way to get your company off the ground and launched to market.

Keeping Realistic Expectations

6. Expecting too much and too soon.

Ask an experienced entrepreneur and he will say that the first year is usually a loss for the business. Expecting profits to come in early is alright as long as you keep accurate financial records. Expanding your business too soon can be a disaster especially if your current operations are barely getting by. It is important to stay grounded and keep expectations as realistic as possible to ensure you plan properly and build the business in the right direction based off the successes and failures that occur in the market.

Market Oversaturated

7. Entering a saturated market.

Some businesses fail because their product is directed towards a saturated market. There are too many companies competing for the same group of customers. Competition is very stiff and the weaker companies end up in bankruptcy. Find a niche market to increase your chances of success. Do your competitive analysis and identify the right solution or product to deliver.

Ineffective Marketing

8. Poor Marketing and Promotions

Marketing is the heart of the business. It is vital for a start-up to create customer awareness and reach your target audience. Know which marketing channels your customers will be more responsive to is very important, whether it needs to be a Facebook ad campaign or a traditional ad in the yellow pages developing a marketing campaign that will be in front of your target market at the right time in their daily routine can be critical in increasing your marketing efforts response. You may have the right product and service but without promoting them the right way, no one will know about it. Use free resources like social media networks and other online websites to promote your company. As an entrepreneur use your passion to speak to people directly about your product or service and be able to inform the market why you are better than the competition in easy to understand language and terms.

Find a cost effective web marketing professional that can build the website and social media brand that your company needs to get off the ground quickly. When talking with potential customers direct them to your website, maintain an active blog and gain authority in your industry. This type of online presence in your industry will help drive referral business to your company in time.

Bad Location Offline and Online

9. Bad location

Choose your location wisely before setting up your business. Make sure that your business is accessible and convenient for your customers. A poor location can discourage people from coming back and buying from you again. Location is just as important for web based businesses however it is your location on Google and other search services with Search Engine Optimization tactics that will improve your online presence and improve your online “location”.

Understanding the Competition

10. Underestimating the competition.

Know your competitors in the business to keep track of their activities. Never underestimate what they can do next because it will lead to overconfidence on your part. Always be ready to adapt to changes in competition. It is always good to keep tabs on your competition with a competitive analysis report. There are other simple ways to keep tabs with the competition: be a customer, sign up for marketing e-newsletters, and talk to your customers that you know have also been their customers.

Common Reasons for Failing


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