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Why Most Small Businesses Fail Within Their First Year (And How To Make Sure Your Business Is Not One of Them!)

Updated on June 12, 2009


There are many reasons why people decide to start up their own small business. Whether they want to make easy and quick money, whether they have long term plans, if they want to start a family business, or for any other reason. There is just a wealth of ideas out there and there is always a chance to exploit the market with a fool proof plan and a clear business strategy in mind.

If the business has been planned and everything has been covered thoroughly, then there is certainly a chance to make a lot of money. That is of course if you can compete with the market and offer customers and clients exactly what they need. The ability to sell and persuade people that they need your product may be the key to success.

The thing is however, that there is a frightening amount of small businesses that fail to make it; with the majority of them failing within their first year. They just fail to take off or they simply do not increase in popularity. Owning your own business can be an extremely tough thing and with the world of business, it is a dog eat dog world. No one can predict from the beginning whether a business will take off, because no one knows whether people will like the product or service that you are offering. You also do not know whether it is good enough to stand up to the competition either.

Why do Many Small Businesses Fail Within the First Year?

It can be exciting times having an idea that you are sure will do extremely well, and having the chance to market it can be even better. It helps to bring dreams to reality and taking ideas from a drawing board into the open world can be exciting. However things do not always go to plan.

Setting up a business is not a straight forward thing to do and in fact it needs to be carefully planned, otherwise it could fall apart before you even start. You need to lay the foundations down and walk before you run so to speak. There are so many different aspects that need to be considered within your business and by ignoring certain things or by being naïve, this can be your downfall later on down the line and incidentally it could be the cause behind your business failing.

Customers and clients are what make businesses successful and without them, it is absolutely certain that your business will not take off at all. So something that you need to consider is how will you offer your customers and clients a service or product that will be something that they need and which they will benefit from? You will need to brainstorm ideas and it is a wise plan to have more than just one idea as a back up; just in case all else fails. It could be that your first idea does not go to plan and then your second or third plan could really take off.

There is nothing stopping you from using your first idea after your business has taken off, because it could be that people were just not sure about it when you first started out. People may be afraid to try something that is new and out there when they have not sampled any other products that you have done before. You will need to adapt your product or service to whatever the customer needs and wants. That is the main thing about business so if you do not adopt this attitude, you probably will fail.

Paying Your Taxes - Essential for small business

Something that proves to be a huge stumbling block and which can cause many small businesses to fail, is the tax that you have to pay. When you have your own business, you are responsible for paying your own tax and keeping records or your income and business expenses. The problem is that people enjoy all of the money that they bring in and they think that they have ages until they have to pay the tax. However, it is amazing how fast the day comes to paying the tax.

Also with this, there are no ifs or buts, you have to pay the tax when you have been told to; otherwise you can end up with huge penalties or even face a jail sentence. A lot of people have to declare themselves bankrupt because they have not saved the tax from their business and they have now been hit with a huge tax bill. Also, a lot of people miscalculate the tax that they owe and they are shocked when the bill comes and they have not saved enough tax at all.

With your small business you will have to pay the normal tax and then when your earnings start to reach a certain amount, you will then have to start paying VAT as well on top of it. This is when you will have to plan your finances extremely carefully and you may need to acquire the help of an accountant to handle your finances.

Why Finances Let Small Businesses Down

Finances can play a huge role in whether a business succeeds or fails. For businesses that fail, it could be that the money runs out well before the business has had a chance to properly take off. It can be extremely expensive setting up a business, including starting up fees, getting stock or products and maybe even hiring staff etc. You will need to effectively manage your money and make sure that you sell a lot of the stock before buying big bulks. By buying too much stock, you risk not selling it and you can then lose a lot of money because of it.

As well as this, some businesses allow customers to buy now and pay later, which can be a big mistake; especially if sales haven’t been too great on other stock. Money is what helps to keep the business flowing. So if you sell a service or a product, you need to make sure that you get a good price for it. You should not undervalue anything, as this can lead to a huge loss and your company would have to cease trading if the losses become too much.

Another big factor that affects businesses failing is due to bad management. This is where bad decisions have been made and sometimes they can be un-rectifiable; causing the business to fail.

If you have an idea, you should try to talk to other people in the industry that you want to go into and try to build up a vision of what you want to achieve. It is all ok doing your homework, but if you do not envisage what you want and set your targets on it, how can you expect to succeed? As well as this, if you have a team of employees, you need to be able to delegate and manage the work load effectively.

Without the correct management, the business can start to crumble and it can be extremely hard to turn it around. As part of the management skills, you may need to recruit new staff. Being able to judge people is something that not everyone can do and this can cause the company to fail in a certain area. You need to think about the type of person that you want to hire and then look out for that particular type of person. You will want to get someone who is experienced, trained in the field that you are specializing in and who comes highly recommended with good references.

Small Business Company Vision

You need to see the future of where you want your business to go and then you need to make it happen. If you don’t then someone else will come in and produce better results than you; ultimately causing your business to close down. You need to regularly assess your targets. Look at your income, results and everything else in order to see what is succeeding, what is failing and what needs improving.

You should constantly look at your business and find ways to improve it. This is because the chances are that the competition will want to compete with you and they may come up with ideas to take away your business. This means that you will have to be on the top of your game, but you should never take any unnecessary risks as this can make some small business fail. You should come up with ideas that are possible and ideas which will definitely not put your business at risk.

There are just so many different reasons that a small business just does not pick up; so you will need to take plenty of time making a business plan before you actually start your business. You do not want to fall into the trap that so many people seem to fall into. It is a good idea to focus upon one specific type of market and make sure that you do thorough research before you even consider starting up your business. Look at your competitor’s products and services and see what ones succeed and fail. Then try to see how what they have done for their businesses has made it to where it is today.


As you can see, there are quite a few different reasons why a small business can fail within their first year. So the best thing to do is to consider everything before you start up a business. Make sure that you seek advice from everyone that you need to, such as an accountant and bank manager etc. As well as this you will need to study the market and ask questions from people who are in the same industry that you want to go into. This will help you to gain as much knowledge as possible. Staying ahead of the market, or at least keeping up with it, often gives you the edge and it can help your business to really flourish when you start it up.

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    • BizVT34 profile image


      6 years ago from USA

      In dealing with more than 500 business owners and their finances I've found the single biggest problem is poor cash flow forecasting and cash flow management. Companies that forecast cash well are able to adapt and work thru the tight spots.

    • profile image

      Word Draw 

      7 years ago

      I'm starting my own business, I'm worried about failure, but I'm hopeful I have a good plan in place.

    • profile image

      Frank Crandell 

      8 years ago

      It sounds like from your hub that the major issue with start-ups is handling your company's finances (paying taxed, budgeting properly for all expenses) correctly. This is a good reminder to track all expenses from day one and to pay the tax man when he calls!

    • profile image

      Beverley Hall 

      9 years ago

      Another common mistake with small business setups is that they often dismiss the use of part-time and freelance service providers. I work for many small businesses who, during this recession, have looked to reduce their overheads and have found that a part-time bookkeeper is more than satisfactory for their requirements.

      Once you take in to consideration that I have to pay for my own professional qualifications and affiliations, my own insurance, holiday costs and sickness cover, you will soon see that these services can save your company a great deal of money.

    • jbgnet profile image


      9 years ago

      Thanks for the post. It's great information for new and current business owners. It's important to find ways and know how to "stay affloat" in the business world.

    • emievil profile image


      9 years ago from Philippines

      I have a lot of clients who are small businesses and some of them come and go. As much as I hate to see them go down, some of them really have no choice. Mismanagement (or no one will manage at all), lack of funds, lack of customers, the economic downturn - all of these were the reasons I've heard from them. It's kind of sad to see these businesses flop but I guess with the kind of profession I'm in (I'm an accountant / bookkeeper), this is a fact of life I have to deal with. Thanks for the hub, Julie.

    • wrenfrost56 profile image


      9 years ago from U.K.

      Hi julie this is a really useful hub. My first home based business idea was a compleat flop, but my new websites are doing better, the information will really help me build on what I have started. Great job.

    • hot dorkage profile image

      hot dorkage 

      10 years ago from Oregon, USA

      A bunch of businesses fail due to reasons that probably could have been prevented. But some fail for things nobody could have predicted.


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