Five Reasons Why Small Businesses Fail

November 09, 2012

Setting up your own small business takes guts and half fail within the first 5 years.

That’s because as many start-ups fail as succeed: around half of all new firms go out of business within their first five years according to Bureau of Labor Statistics compiled between 1994 and 2010 show. Having a good idea, lots of passion and some cash to get you going is a great start. But that’s all it is. A start.

There’s no one blueprint for building a successful small business, contrary to what all those business self-help books claim. But, if you manage to avoid these five common mistakes many start-ups make then you’ll go a long way to getting your business off the ground:

The founder isn’t cut out to be boss

It makes no difference if you have a great idea or a good strategy if you’re not good enough to put them into effect. Of course you’ll make mistakes running your small business. It’s also possible for you to grow as a CEO along with your company. But it’s not enough to be a fantastic salesman or to have a great head of figures. Being the boss requires a combination of skills: you have to be a good motivator, team leader and project manager as well. So take a look in the mirror and ask yourself: am I really up to the job? There’s no shame in realizing you don’t have what it takes to be in charge. You can find a partner whose skills complement your own to help share the leadership burden.

The start-up doesn’t have a reason to exist

Your small business doesn’t just need a good idea, it needs a “why?” Why does it exist? Why is it different from its rivals? Do your homework on the competition before starting out. A quick Internet search can provide you with plenty of useful information on what your rivals do, how they do it and how much they do it for. By studying them you can learn how to be better than them and avoid some of the mistakes they’ve made.

It doesn’t have a target market

It’s good to find a niche for your small business, but it’s got to be sustainable. You need to ask yourself: “Does anybody actually need what I want to offer?” Just because your idea or product isn’t available anywhere else that doesn’t mean there’s a gap in the market. It could just be that no one wants it. There is a rare breed of entrepreneurs who create something that fulfils a need that no one thought existed. Henry Ford said: “If I had asked people what they wanted, they would have said faster horses!" But very few of us are latter day Fords. Better to stick with the advice of Andrew Carnegie, who said: “Pioneering doesn’t pay.”

It competes on price, not on service

A start-up whose only strategy is to undercut its rivals is unlikely to survive for long. A small business can’t afford to get drawn into a price war, especially against rivals that are bigger and have been around for longer. Remember that your customers are your best sales and marketing team. If you’re cutting your prices then you’ll be cutting corners on service. How many times do you go back to companies that offer lousy service? Then why should your clients? If you’re forced to continually find new clients because your existing ones have deserted you then you’ll soon run your business into the ground.

It grows too fast, too soon

Every new business needs to grow, but that growth has to be measured. There’s a clue in the term “meteoric growth”. Make sure your business isn’t one that soars upwards but then burns out quickly by having good management systems in place right from the start. If you control the key areas of your business, such as sales and finance, you will have all the key figures to help you run it properly as it grows. Adding new clients if you don’t have the resources to serve their needs or investing heavily in costly new equipment if you don’t have the pipeline of sales to repay your investment can be recipes for disaster.