5 Reasons Why Small Businesses Fail

Reports of small business failuremay or may not be exaggerated in the Australian context, but it remains true nonetheless that operating a small business comes with few guarantees of success.

As a small business manager or employee, focusing on failure won’t do you any favours; however, being aware of common pitfalls can help you to sidestep run-of-the-mill problems and set more realistic expectations for you and your business.

5 reasons that your small businesses might fail

1.You started a business for the wrong reasons Starting a small business with the singular goal of making a lot of money often leads to disappointment: the financial rewards gained from operating a small business are often not enough to counteract the reality of long hours, great physical demand, and repeated setbacks. You will likely experience greater success if you are passionate about your field, physically strong, and both patient and determined in the face of failure.

2.You haven’t researched or planned well Many small businesses encounter problems because they have no conducted thorough research or generated a solid, detailed plan before starting out. You need accurate and contemporaneous information to make good business decisions, including careful consideration of what your business stands for and what it offers, the financial climate, budgeting and financial constraints and opportunities, the employment market, and competition.Whether you are planning to apply for a loan before or during your business operation, you should develop a formal business plan. This process forces you to consider what lies ahead and the challenges that you may face. A Business Plan also compels you to take stock of your financial needs, devise marketing and management plans, assess your competition, and know your overall strategy in and out.Research and planning are ongoing, recursive processes: you will need to reassess your position and goals on a regular basis.

3.You positioned yourself unwisely This applies to both your position in the market and your physical location. Consider your competition and your accessibility. Does it make sense to operate as an online vendor if your target customers are elderly people who access the Internet less often and with less confidence? Are there several similar businesses in the same street or suburb? If you expect to attract a large volume of customer traffic, can your server or car-parking allocation handle it? This pitfall relates, again, to insufficient planning. And remember that your position can shift gradually over time due to external changes.

4.You exercise poor financial control That poor financial control leads to small business failure is a no-brainer. Common problems for small business include taking on too much debt,guestimating financial position (i.e. cash flow) rather than keeping meticulous records, and not retaining enough reserve capital to carry you through seasonal declines or unexpected hiccups. If you struggle to keep track of the ‘business side of business’, consider outsourcing these tasks to a professional small business bookkeeper. It could save you a lot of cash — even your entire business — in the long term.

5.You have grown too fast Some small business operators gauge their success by rapid growth — or try to impress potential investors with the promise of speedy expansion. In fact, growing too fast is a common cause of cash flow crisis and bankruptcy. Rapid growth places enormous stress on your organisational, financial, and employee structure. Without trying to stymie expansion, focus instead on slow, steady sustainable growth. To accommodate growth, go back to the drawing board. Research and plan. Make sure that you understand why your business is growing so that you can respond to your increasing customer base or demand in an effective way. Importantly, you will need to plan your cash cycle so that you can meet all of your expense obligations in the growth phase, including cost of goods and wages.

Of course, small businesses can fail due to a combination of any of these problems or many other problems that we have not mentioned here. But, by making sure that your heart is in the right place and that you conduct thoughtful, thorough research and planning, you needn’t bolster failure statistics.

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