Starting a small business is easier than it’s ever been but still requires a lot of work and careful planning. There are over 31 million small businesses in the United States as of 2020. Putting in the work during the planning phase/before filing any paperwork is important though because of the statistics related to small businesses. About 20% of small businesses do not survive a year, 50% of small businesses do not make it to the 5 year mark, and only about 35% of small businesses are still in operation after 10 years. The reasons all of those small businesses fail are varied but there are some common reasons that appear over and over. This article will highlight some of those common reasons small businesses fail.
The most reported reason for a small business to fail is financial difficulties, aka running out of money. Businesses need money for payroll, day-to-day expenses, paying invoices, servicing debt, and much more. Owners of small businesses that fail are frequently not as knowledgeable about the exact amount of revenue the business produces and/or the expenses the business pays out. Shortfalls or differences in those two amounts here and there do not instantly doom a business, but when they are underestimated over a long period of time or are accompanied by a major shock (financially), the small business risks failure.
Poor management is another common reason for small business failure. Founders of small businesses frequently “wear many hats” to try to get the business off the ground because they typically do not have the financial resources to pay separate people annual salaries to perform the corresponding duties. The problem is that while the founder may have a great business idea and be adept when performing some of the business roles, they may not be good at all of the roles. For “1 man army” situations, where the founder is the only employee of the small business, there are no other employees to provide necessary feedback to let the founder know they are not performing well when “wearing some of their hats.” Poor management is also harder to overcome in small businesses where each employee’s decisions have larger impacts (proportionally), compared to a large business with thousands of employees.
Lack of marketing or poorly executed marketing is another frequent reason given for small business failure. Many small business founders believe that if their product is good enough “it will sell itself” or that they should devote enough resources to have “good” marketing but not the “best” marketing. These factors and more feed into sub-par marketing that typically leads to sub-par sales.