Everywhere you look, there are damning statistics on the rate of small business failure. Data within the Caribbean region is very dated or limited. The international statistics, however, are really gut wrenching. For instance, the Office of Advocacy reports that only 78.5% of small businesses survive their first year. For context, that means about 1 in 5 will fail before the end of their first year in business.
The US Bureau of Labor Statistics equally reports that 20% of small businesses fail in their first year, 50% fail before they clock 5 and only 30% make it past the ten-year mark. As far as these statistics go, the world of small business is a dog-eat-dog world and if you’re not careful, your business could go under faster than the Titanic.
But what really causes this startling failure rate. Is it because these businesses started out selling the wrong product? Did they get their pricing wrong? Was it because of poor management? You don’t see a lot of articles dwelling on why these businesses fail but that’s exactly what we’re going to do in this article.
We will examine the most common reasons that experts have pointed out for the failure of small businesses so your business too can learn and avoid them. Here are our top reasons for why most small businesses fail.
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#1: Lack of Cash
This is one of the most common reasons for business failure, and also the most painful. It can be difficult to swallow, but so many businesses fail simply because they were not able to generate enough investor interest or cash flow to stay afloat. A business can run out of cash by failing to raise sufficient initial capital to cover startup expenses or failing to generate enough cash from operations to cover day to day expenses. The statistics also bear this out.
As Investopedia reports, of the vast number of small businesses that fail each year, more than half state that a lack of funding was to blame.
If your business is to survive long enough to be successful, one of the first things you will have to carefully map out is your plan to get capital and achieve free cash flow. An accountant can play a significant role in ensuring that your business achieves this by properly estimating your monthly cash burnout rate which includes your directs costs, overhead expenses, investments in research, repayment of borrowings, as well as fixed assets such as machinery.
#2: No market need
Almost every failed business has been guilty of this at some point. You have a great idea that works beautifully on paper. But when you have shelled out on the idea and built a business with it, you discover that nobody actually needs what you’re selling. Although it seems like the perfect “face in the pie” moment, you’ll be surprised at how many make this mistake.
This is by far one of the most common reason why the startups fail. They focused more on tackling problems that are interesting to solve rather than focusing on those that serve a market need. As a business owner, it is an unforgivable error if you fail to take the time to conduct feasibility and market impact studies. More often than not, business owners who did these and still saw their business fail due to a lack of market need only failed because they failed to confront the truth. Nobody needed what they were selling.
To avoid this error, it’s best to work with an independent expert in conducting your feasibility and market impact studies with you. It is important to note that we recommend that an aspiring entrepreneur works closely with the expert or consultant. This is because the real value captured within a feasibility or market impact study is the data collected in the research phase which may include speaking with potential customers within your target market. So, work with a consultant and let them assist you in critically studying the industry and help you understand whether your business is barking up the wrong tree before you start climbing.
#3: Poor pricing
Although it sounds surprising, poor pricing has contributed to its share of small business scalps over the years. You spend so much time in creating a product, then you cut yourself below the knees by underpricing or overpricing. As a result, the business either earns far less than it should and becomes unsustainable due to underpricing or chases customers away with its overpriced product.
While the statement that every business should know its customer seems self-evident, that’s the exact error these businesses make with their poor pricing policy. No matter how much you want to change the world with your product, you can miss the boat by a mile simply by failing to understand your customer.
The best solution for businesses that are still afloat but facing this issue is to invest in customer research, analytics and reporting tools to understand the behavior and preferences of their customers. You’ll be surprised at how much you will understand just by investing in a sound Customer Relationship Management software such as HubSpot CRM, a market survey tool such as Survey Monkey and a bit of industry analysis from a competent consultant.
Another essential strategy is to engage an accountant to ensure a proper bookkeeping and accounting system exists to understand the full cost of your products and services inclusive of overhead contributions. The overall cost structure of a business is usually one of the major factors for establishing an appropriate pricing strategy along with understanding your consumer demand, pricing of competitors, and the overall price sensitivity of your product.
#4: No business model
Another big reason why small businesses fail is because they simply do not have a plan. As weird as it sounds, so many businesses are guilty of this. They do not have a sound business, financial or marketing model and most pay the ultimate price due to this omission.
A strong business model is essential as it helps the company chart its course and determine how it capitalizes on strengths and opportunities. However, a common trait among many failed businesses is that the founders did not have a solid business model.
The majority of new disruptive businesses over the last decade or so have not been created by technology innovation but rather business model innovation. Think of Airbnb, which is the biggest accommodation provider in the world but does not own a single property or room. Or Alibaba which is one of largest online wholesale and retail companies in the world but doesn’t own any inventory.
When you’re starting your small business, you should know that doing is only half the work. Planning is a much more important element for success and as these stats show, businesses that fail to plan, only plan to fail.
To avoid falling trap to this common error, businesses should familiarize themselves with the Business Model Canvas developed by the Swiss business model guru Alexander Osterwalder and Management Information Systems professor Yves Pigneur. It is a great tool to map out and dissect the moving pieces of your entire business activities.
#5: Poor Planning
What’s worse than entering into business with no plan? No prizes for guessing. Yes, entering into business with a poor plan. Entrepreneurs often think entering into business is simply about finding a nice idea and selling it to others. But it involves so much more. We have always been amazed by local startup entrepreneurs who believe that proof of concept is their debutante ball paving the way to success and wealth.
Reality check, it is not! There is life after proof of concept and it involves actually running a business. Issues such as choosing the right business structure, post registration requirements, legal protections, tax filings, cash flow, and human resource management can sink your business overnight with disastrous long-term effects.
Proper planning will highlight potential problems that may arise in the course of the business, giving you notice and the opportunity to find a preemptive solution. While it is not compulsory to draw up a 100-page business plan (in truth, most of this is filled with unnecessary jargon), you should understand what you want to do.
Your business plan should clearly indicate your finance sources, marketing and promotional strategies and other important issues. Poor planning is a management problem and a problem like this will wreck businesses almost every time.
In fact, according to this research, poor management will wreck a business 7 out 10 times. It reports that 71% of businesses fail due to poor management, both in terms of planning and control of working capital. So, if you want to avoid failure for your small business, you must take your business planning very seriously.
#6: No Differentiation
The last reason we have for why businesses fail is because they don’t take the effort to infuse originality in their product. This is especially of major concern in places like the Caribbean. Here’s a question: If ten people all on the same street take to selling burgers and hot dogs, who will have the most success? Exactly. The person that takes the time to provide something different.
Too many businesses fail because they simply try to mimic other successful businesses without really understanding how they work. One entrepreneur brings out a new idea that has everybody in an uproar and then before you know it, 20, 30, 40 others have copied the same idea, effectively ruining the opportunity for everyone.
Here’s how Warren Buffet describes it: “First come the innovators who see opportunities that others don’t. Then come the imitators who copy what the innovators have done. And then come the idiots whose avarice undoes the very innovations they are trying to use to get rich”.
If you really want to make your business successful, you need to put plenty of effort and time into thinking up what will make you different. If you choose to follow the crowd instead, you just might be consigning your business to failure.
In all, the best service you can do your small business as an owner is to be smart, longsighted and quick to take action. If you keep stepping lightly and remain ready to innovate as the situation demands, you will be marking your 5, 10 and 20-year anniversaries before long.
As you’ve also seen, businesses cannot hope to attain much success without relying on knowledgeable professionals that can help their business. If you’d like to speak to one of our trained consultants about our advisory solutions which provides your business with valuable insights and strategies to ensure that it has the best chance of success, then schedule your free consultation today! You’ll be saving yourself and your business much more pain than you can imagine.