Why do small businesses fail? Tammy set a path to discover why her small business wasn’t thriving.
Tammy, a skilled and gifted horticulturist, called me to discuss what she needed to know to start her own florist and landscaping business. She had been in the horticulture industry for 10 years and was incredibly skilled at working with flowers and plants – one of the best. She also had great design skills, as well as good customer service skills. But she had little business management experience and less self-employment experience.
Discovering why small businesses fail was a smart research project for her, as it helped her uncover her own weaknesses and begin to build up some strengths before she invested in becoming self-employed.
It’s no secret that many small businesses fail. The important questions are: Why do they fail? And what can you do now to prevent problems in your own business?
As Tammy and I talked, we reviewed some of the common reasons why small businesses fail. Below I’ve listed the 15 most common reasons why small businesses fail to grow, which might help you to determine why your business is stuck (or prevent your business from falling off a cliff!).
Some of them are related to learnable business skills; others relate to personal attitudes, habits, or self-sabotaging beliefs, which are not so easy to change, except through coaching or other self-development work.
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Top 15 reasons why small businesses fail to grow and thrive:
- Mistaking a business for a hobby: Just because you love something doesn’t mean you should convert it into a business. Too often businesses fail because the owner feels their passion is shared by others. Research your business idea and make sure it’s viable. Do others want/need what you’re selling at the price you want to sell it at?
- Poor planning: Yes, you must have a business plan. It can be a simple three-page plan or a huge 40-page plan. The point is that you’ve looked at all the aspects of your business and are prepared to handle problems when they arise. Your business plan helps you to focus on your goals and your vision, as well as setting out plans to accomplishing them. And don’t get mellow – revisit and revise your business plan annually.
- Entrepreneurial excitement: Entrepreneurs often get excited about new ideas, but are unable to determine if they’re “true opportunities” rather than just “an interesting idea.” Or, they have a super idea but can’t put it into practice. Test every new idea against your business plan and mission statement before deciding whether to undertake it or not, and ask yourself, “Do I have the time, skills, and resources to implement this?”
- Putting all your eggs in one basket: Too often, small business owners will have just one product, one service, or one big client. They cling tightly to this one thing because it brings in good revenue. But what if the one thing disappears? Variety and diversification will cushion you against the ebb and flow of business tides.
- Poor record keeping and financial controls: Yes, you have to keep financial and business records, you have to review your revenue and expense report each month, and you have to file taxes and other business-related filings. If you don’t know how to do these, or don’t want to, get help from someone who does.
- Lack of experience in running a business or in the industry you’re entering: There are so many hats you have to wear, from marketing and selling to management and finance, in order to run a business effectively. On top of that, you have to understand your industry, the skills required to offer your products and services, and the trends in the industry. If you don’t know about these basic skills, educate yourself. Talk to others who are successfully running their own businesses, talk to industry leaders, get a book, find a website, get a coach, do your homework. And keep increasing your business and industry skills by attending classes or reading new books every year.
- Poor money management: You need to be able to live for one to two years without income when getting started; often businesses are very slow to get off the ground. Also, you have to create and use a realistic business budget, and not constantly drain the business income on personal spending.
- Wrong location: If your business has a “bricks and mortar” location, you need to make sure that you are convenient to your customers, and near to your suppliers and your employees. Even something as simple as traffic patterns and parking can make or break your business.
- Competition: Customers will go where they can find the best products and services. It’s important for you to know who your competition is, what they have to offer, and what makes your own products or services better.
- Procrastination and poor time management: Putting off tasks that you don’t enjoy will sink your business faster than anything else. You can’t afford to waste time on unimportant tasks while critical tasks pile up. All tasks need to be done; if you don’t like to do them (or don’t want to spend your time doing them), hire someone to do them for you. If your time management and prioritizing skills are rusty, hire a small business coach, take a class, or join a mastermind group to help you be accountable for getting things done.
- Ineffective marketing: Learn the basics of marketing and make sure that you track the success or failure of each marketing technique you use, then dump those that aren’t working. Read my blog post series on Why Marketing Fails to help you figure out what’s not working.
- Ineffective sales techniques: Once you have a potential client, you have to know how to lead them down the sales path. If you don’t understand the basics of selling, get some education on it immediately. If a selling technique doesn’t work, try another one.
- Poor customer service: Once you have a customer, you have to keep them. There are two key points here – make sure you pay attention to what the customer wants (and how these wants can change over time), and make sure you quickly return phone calls and emails, proper billing, win-win problem solving, and an overall pleasant demeanor.
- Entrepreneurial burnout: owning your own business requires a huge investment of time, money, energy, and emotion. It’s easy to work long days and forget to take time off. But in the end, this only causes burnout where your motivation and creativity will suffer, and a pessimistic attitude prevails. You’ll find yourself unable to balance your business and personal life, and both will suffer. Schedule self-care time into your work week and be religious about taking time off from your business. Read my blog post for 44 Tips for Dealing with Overwhelm.
- Poor cash flow: Let’s face it — having enough cash on hand to pay your bills is crucial. And having enough cash on hand, or access to capital via a loan, to launch the next stage of your business growth is mandatory. Too many small business owners stall because they don’t have enough cash.
Dunn and Bradstreet, in their 1994 Business Failure Record, determined that nearly 90% of small business failures are directly caused by lack of managerial expertise…people didn’t know how to properly run a business. A small business coach or your local Small Business Development Center may help you to learn the managerial expertise you need.
As Tammy and I concluded our coaching session, she made a list of the areas where she needed to grow, and created a task plan to get the help she needed. Today she has a thriving business and is happily self-employed. You can do it, too. It just takes a little planning and a close look at both the reasons for your success and where you might need to get a little help.
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