Why Small Businesses Fail

by Teddy Reynolds

It is common wisdom that few small businesses survive past the first two years, and fewer still make it past the five year mark. The common wisdom does tend to exaggerate the actual rate of failure, which was quantified by the Small Business Administration as a 30 percent failure in two years and just under 50 percent failure rate after five years. The odds are better than most people think, but failure is still common enough to warrant a close look.

Taking a proactive approach to failure makes good sense. Learning the most common pitfalls can provide you an opportunity to avoid them with your start-up. Owners are people, and they are as prone to attribution error as anyone else. With a little objective analysis of your business based partly on the following common reasons for failure, you will increase your chances of success.

Owner(s) Lack Business Education.

If you’re starting a retail nursery, it’s likely you know plants and love everything about gardening. You more than likely have a degree in landscaping, horticulture, or botany as well. Do you have what it takes to manage a business though. Many start-ups fail because the owners failed to realize the specialized skills necessary in managing a business. Customer service is certainly important, but marketing, establishing supply chains, budgeting, and accounting are also must-have skills. You don’t necessarily need a degree to start a business, but a few classes can prevent many mistakes.

Lack of Emergency Planning.

The Chinese character for crisis is opportunity. The recession certainly brought opportunities for many investors, but even people facing foreclosure got one opportunity out of the crisis. Emergency planning is necessary in every circumstance. If your business feels secure and a steady stream of income is flowing, it is the perfect time to begin putting away emergency funds. Hopefully you will never need them, but too many businesses fail due to the lack of a cash cushion.

Overexpansion.

Success can bring out the conquistador in most anyone, and this should be guarded against. Your success in a particular market does not mean that success will carry on with other products or services or other markets. Slow growth should continue per your written business plan, and any expansion should be researched thoroughly and included in the plan. Only then is it a wise idea to seek funding and make significant expenditures. It is also wise to double down on emergency funds before making a major move.

Insufficient Funding.

Every new business requires funding for start-up and operating costs. Start-up costs can be calculated before you ever sign a lease or place an order. Operating costs have to be estimated as a monthly expense. At minimum, you should expect to need 12 months of operating costs in hand or on the way before setting up shop. Remember, these funds have to keep the doors open until income can cover overhead.

Business can fail for a lot of other reasons, and some are completely out of the owner’s control. Most failures boil down to one thing, however – a lack of business knowledge is the primary culprit.

Teddy Reynolds is a freelance writer in Washington, D.C. To read more about MBA options click here.