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Some reasons businesses fail
Starting and running a business takes patience, perseverance, and a lot of hard work. Launching a new venture is particularly difficult: Data from the U.S Bureau of Labor Statistics shows that nearly half of all startups fail within the first 5 years of operation.
There are some common reasons why small businesses fail. Understanding the obstacles that other business owners have faced can help you navigate these specific challenges. Below are some of the top reasons why small businesses fail.
Wrong audience for your product
Nearly 35% of small businesses fail because there’s a low need for their product. When there’s no demand for what you’re selling, the best marketing campaign won’t turn things around.
Avoid this risk by doing the right market research before you launch. There is a real need for a business plan. The National Federation of Independent Businesses reports companies with a business plan have the best chance of success — particularly if they identify their potential markets, define their ideal customer, and analyze their competition.
A business plan is a outlines important information regarding operations, goals, and finances. Your plan should be completed long before your products are available to customers. Failing to do so can leave your business unprepared.
When writing your plan include at least the following:
- A summary of your business and a clear company description.
- A clear brand identity: what makes your business unique from others.
- Information regarding your company’s organization and management structure.
- The products and/or services you will offer.
- Your marketing and sales strategies.
- Financial projections for your business, as well as any funding requests.
When crafting your business plan, highlight how you will attract and retain your customer base and what services, products or experience makes your company unique. Many good, affordable resources can help you estimate the demand for your product or service. Try Google Trends, a free tool that can show you how often people are searching for keywords related to your product or service. Surveys and focus groups can also help you get feedback on a minimum viable product during your development process.
Cash flow problems
Cash flow is a metric that indicates how money is coming in and being spent at your business. Cash flow issues can result from a lack of funding, poor budgeting, or inventory management issues, among other things.
There are a few ways to mitigate this risk. First, avoid big expenses in your first year of business. A lean operating budget is a good starting point, but it isn’t the only way to manage your cash flow. Spend time tracking your inventory, building cash reserves, and making sure your accounting is running smoothly.
The other side of cash flow is revenue, or financing, for new businesses. Many small business owners struggle to find loans, grants, or investors to fund their ventures. Look for unique funding opportunities for businesses such as government loans, business diversity grants, or industry-specific grants.
Poor Management
As the creator and founder of the business, it can be tempting to hold tight to the reins as your venture gets off the ground. Unfortunately, attempting to do everything yourself is neither sustainable nor helpful for the longevity of your business.
“The owner may have the skills necessary to create and sell a viable product or service, but they often lack the attributes of a strong manager and don’t have the time to successfully oversee other employees.
“A business owner has greater potential to mismanage certain aspects of the business without a dedicated management team whether it be finances, hiring, or marketing.”– Investopedia.
Your budget may not allow you to hire a leadership team but look for ways to delegate key roles effectively.
Financial challenges
Financial challenges are hard to avoid, and they make it difficult for your business to flourish and remain profitable. Limited funding, combined business and personal finances, and issues with budgeting or establishing prices are very common financial issues a small business faces.
Entrepreneurs should understand various funding options, such as traditional loans, personal loans, microlenders, crowdfunding, and investors. Depending on what stage your business is in, some sources of funding — including a combination of sources — may be more appropriate than others.
Once you’re funded, have a clear understanding of where your money goes is essential for ongoing success.
Poor employee management
A poorly managed business can lead to serious results, hindering a company’s chances of success. It’s astounding that nearly 20% of startups fail due to employee problems and other human resource-related issues. It can lead to excessive turnover, stress and anxiety, reduced engagement, and poor bottom-line results.
Create a process that sets up new team members for success and identifies the resources they need to feel supported. Consider implementing feedback tools to improve employee engagement and foster a vibrant work environment.
Management should be trained regularly to build and enhance leadership skills, including providing feedback and recognition to employees to show appreciation for their performance and efforts.
Inventory Management
Poor inventory management drains a new business’s resources and accelerates failure rates. Many businesses start out by purchasing large amounts of inventory, planning to sell it for a profit.
If those products don’t sell as quickly as planned, inventory can become obsolete or lose value, especially food and shelf-life items. On the other hand, if you underestimate how much inventory you need and it sells out too fast, you risk losing sales. Stockouts also result in a negative customer experience, hampering your ability to build brand loyalty and keep customers returning.
Inventory management tools can help make sure your items are kept in stock for the right amount of time. Stay on top of your supply chain to make sure you have the right items on hand and pay attention to your sales to catch any dips or peaks in demand before you make an ordering error.
Understanding basic business fundamentals and common reasons behind small business failure can help you avoid those mistakes and increase your chances of success.
Ineffective marketing
Marketing has become a big contributing factor as to why small businesses fail. In fact, 22% of failed businesses did not implement the correct marketing strategy.
Marketing and sales can be costly and ineffective if your small business has no branding, no direction, no uniqueness or no strategy. Lack of vision will fail to attract customers, or it can even turn them away.
Identify your market segment and determine how you want to approach potential customers. Test your marketing strategy by creating relevant content and campaigns. Finally, develop a plan to measure ROI, including tracking metrics like overall website traffic, email open rates, social media and cost per engagement — and then adjust as needed.
Failure to adapt to market shifts
Adaptability is essential to keeping up with our ever-changing cultural needs and economic climate. Because change is inevitable, business owners must avoid becoming complacent and adjust to market shifts.
Hiring creative and forward-thinking employees who understand and believe in your mission will help you create a positive work environment and provide opportunities for growth and development.
- Conducting research to what’s hot, trending, and relevant.
- Knowing your target audience, their needs, and their behaviors, as well as how they may change over time.
- Staying current with technology.
- Continuously assessing whether your products or services are outdated and deciding if improvements — or even an entirely new product — are needed.
Clearly there are more reasons, but these are the formative basics. As always, Lang wants you to keep growing properly so watch your whole business not just the cooking part.
