wooden sign closed hanging in shop

7 Reasons Why Small Businesses Fail (And How to Avoid Them)

There can be several reasons new, small businesses fail to succeed. These are some of them, but don’t be blinded by this list. There are always new problems on the way around the corner. With proper risk management, you can avoid failing your business. More about risk management in this post.

Let’s dive right into the things that can cause your small business to fail.

1. Too competitive industry

Even that the world still has plenty of room for new businesses, some industries are just too competitive by themselves. That might be just the industry or the location that is crowded, if we are talking about a physical store.

One option is to establish your store online, where you have a broader audience. However, this is also a double-edged sword. Online, there is also a lot of competition, but there are benefits as well. If you can stand out from the crowd with great products or expertise, you might have a chance of success even in a more competitive field of business. I have a post about the benefits of an online business as well; you can read it here.

The industry you are planning on starting a business in, or have already established one, might have a lot of competition. However, there are ways to stand out, as I said before. There is a good book related to how to win in an already very crowded field of business. It is called Blue Ocean Strategy. I highly recommend it to anyone who wishes to start a new business or improve their current one.

2. Not having a business plan

The second thing on my list is not having a business plan. Don’t get me wrong, you can still succeed without having a proper business plan. However, by doing some kind of plan to execute, you will see the big picture more clearly.

Getting the thoughts out of your head into one place will not only help you see your idea more clearly, but it will also operate as a guide, a blueprint when you begin to build up your business.

A business plan can also be needed if you seek outside funding for your business. Investors and banks usually want to see some kind of planning, instead of you telling them you have a really good new business idea. There are other reasons why a business plan is a good thing to have. I have a post about that as well. You can read it here.

man wearing black and white stripe shirt looking at white printer papers on the wall

3. Too narrow audience

The third reason your business might fail is too small audience. Even if your product or field of business is popular in one corner of the world, the local audience you have might be too small for your business to be successful.

A good way to reduce the risk of having too narrow audience is to do proper research about if there is enough demand for the product or service. Another way is to take it online, but here comes the risk of too much competition.

One way of knowing if there is enough demand for your product or service is to see the local supply. If there already are two barbershops in town, but they are very hard to get reservations to, there might be room for a third player in town. If your competitors are always fully booked, that might mean there is more demand than supply.

4. Bad money management

Poor money management is the fourth thing on my list. Even if your idea was perfect and there was a lot of demand for the product, if you can’t manage your businesses financials, there is a good chance your business will fail.

First of all, doing a proper business plan will give you estimates of the costs of starting and running the business. Follow your plan and even after establishing the business, do a budget and calculate how much you can spend on each thing.

Remember that plans and budgets are useless if you don’t follow them. Before spending extra on anything, check your budget and plans to see if you need that money for something else. Another good thing to do is keep a bumper. Meaning, keep enough money in your account to cover some unexpected expenses that might come to your business.

5. Not adapting to changes

The world is changing faster than ever nowadays. So the fifth thing that can cause your small business to fail is not adapting to the changing world. The change today might be moving part of your business online or considering new trends that are headed towards your industry.

Horse sellers from the 1900’s probably have lost some of their audience to cars by now. If they didn’t focus only on selling racehorses or cars as well, they probably are out of business by now.

120 years is a long time, today, every-day items that we use might have been replaced 10 years from now. Keep up with the changes in the world and you have higher chances of surviving in your field of business.

6. Not understanding the customers

Next thing on my list is not understanding your customers. Put yourself in the shoes of the customer. Ask your customers and potential customers, what they really want. What is the purpose they want this product or service? Don’t just assume what they want.

You should also have some expertise in the field you are starting a business in. Not knowing anything about golfing might be a bad idea to start a golf equipment store. If you don’t know anything about the niche, the chances of you not understanding what the customers are looking for are even higher.

7. Wrong location

The last thing is focused more on businesses, that require a physical location or presence. Like I said earlier, even if one business works well in one place in the world, it might not work where you plan on operating it.

Choosing the wrong business in the wrong place is a bad combination. There might be a start spike in your sales and visits, when people want to see, what the business is about. If the business doesn’t have the local audience and customer base it requires, there is nobody to buy the product or service. Even if there were a few people, is that enough to pay the bills?

Make sure your product or service has enough demand for it. Customers are essential to your business to succeed. Without sales, there will be no profits. You won’t be able to afford paying the bills from your business account if it has no income. Do proper research before starting a physical store.

Final words

These are just some of the things that can cause your small business to fail. Things can vary in different industries. You can avoid and prepare for most of these by proper planning and research.

On top of that, keeping enough bumper in your account can also help you survive, even if a global pandemic hits and your sales decrease for some time.

Hopefully this was helpful to you, have a nice day.