Seven Reasons Why Small Businesses Fail

At Haven, we always try to maintain a positive outlook on things.  We say “try” because, hey, we all have our moments…  But everyone who’s ever run a business knows that a can-do attitude is essential to success.

That said, there’s a great scene in the movie the Big Short in which an investor explains that people hate to think about the downside risks, so they always underestimate their likelihood.  So as much as we like thinking about the upside, we always start by thinking about the downside and managing to avoid it before we move on to focusing on optimizing for the upside.  And that works for any small business, too.

So when you’re thinking about your small business, start thinking about the most common reasons why your business could fail.  Be honest with yourself in what you stack up on those dimensions, do what you can to address those issues, and then move on to focusing on how to achieve the upside.

Here are seven common reasons why small businesses fail, and if you can quickly address these issues, then you’ll free up a lot of mental bandwidth and creativity to grow your business into something great!

1. No Real Market Need.

If you’re going to put your heart and soul into a business, then you want to make sure that all of that effort is going to go toward something real.  But if your business sells something that no one wants, then you’re putting in all of that effort for nothing.  So before you start off on your journey, do some legwork up front to validate your assumption that the market actually does have a need that you can satisfy.  Think about who your prospective customers are and try to talk to them to make  sure that you really understand who they are, what they value, and what they need.  If they don’t care about what you plan to offer, then take that as a sign that you need a new concept.  It’s better to walk away and lose the small amount of time that you’ve put into the business so far than to keep chasing something that isn’t going to go anywhere.

Also, keep in mind that market needs can also disappear over time.  Whichever company was the last company to make buggy whips probably made the best buggy whip you ever saw, but eventually the car made buggy whips irrelevant.  In addition to asking your customers what they want and need, make sure you always ask them why.  Keep asking why to go deeper and deeper to get more insights.  If something else can satisfy that same why, then you’re at risk of becoming a buggy whip.

2. Poor Business Strategy.

Okay, so let’s say that you’ve done your homework.  You’ve talked to lots of prospective customers, and you think you have a pretty good idea of what they need and why they want it.  Are you home-free?  Not by a long shot.  Unfortunately, plenty of businesses will still fail because they just don’t have a good business strategy.

What’s a good business strategy?  It’s a way of figuring out how you can take the limited resources at your disposal to solve your customers’ problems and get paid for doing so.  But if you have limited resources, as we all do, then you can’t possibly do everything, can you?  So a good business strategy will acknowledge that the business can’t be all things to all people.  You’ll have to choose.  Which customers do you want to serve?  How do you want to serve them?  And what goods and services will you consciously decide not to offer?  Draw some clear lines around what you aren’t going to do so that you can maintain your focus on what you are going to do.

3. Poor Marketing Strategy.

Even businesses that get the business strategy right still face a risk of failure.  If a tree falls in the woods and no one hears it, then does it still make a sound?  If a business makes the best goods or services around and no one knows that they do, then does it really matter?  Not at all.  And businesses that don’t figure out how to tell their market what they do and why they’re the best don’t stick around very long.

So once you’ve settled on a target market and a business strategy, spend some time thinking about how you’re actually going to reach those customers.  There are tons of marketing strategies you could use, including everything from digital marketing to physically knocking on doors, and you can’t use all of them.  (See a pattern?)  So think about which marketing strategies are most likely to reach your customers in a cost-effective way, try those strategies, and then evaluate them on the backend.  Go with whichever ones are performing the best and drop the ones that aren’t.  And make sure that you reevaluate every so often, too, because the effectiveness of different marketing strategies will change over time, too.

4. Poor Operations Management.

Strategy, strategy, strategy.  That’s all there is to it, right?  Wrong!  Execution matters, too.  However you do what you do, make sure you understand the process and focus on getting good at it.  Try to optimize that process and squeeze out inefficiencies.

A good place to start is to map out all of the steps that show up in your processes.  What’s the bottleneck that limits your ability to produce more goods or services?  Can you speed up that step in the process?  Becoming more productive at any other point in the process isn’t going to help you very much because you’re still limited by whatever step in the process is your bottleneck.  But if you can increase productivity at the bottleneck, then you should see some real returns.

If this sounds like a manufacturing process, then that’s because that’s where a lot of these concepts come from.  But they apply in services, too, so always think about the process and how you can make it more efficient.

5. Poor Cash Management.

Another important part of executing on your strategy is making sure that you get paid for what you’re doing and then managing that cash flow so that you can finance your activities as the need arises.  Businesses that don’t learn how to do this almost always run into trouble.

Think of it this way.  Whatever your business does, you’re going to need to buy inventory, equipment, materials, and supplies.  You’re going to hold those items for a while, and then you’re going to turn them into your goods or services and sell them.  At some point in there, your customers obviously need to pay you, or you’re in trouble.  But when they pay you matters because you need to finance the period between when you pay for inventory and when customers pay for your goods or services.  If customers pay you in advance, then you’re in great shape.  But if they don’t, then you might find yourself unable to make payments to your creditors or to make needed investments in the business.  If you’re in this bucket, then look for external sources of financing from banks and other lenders.  Don’t get caught without cash to do what you need to do to make your business successful.

6. Gaps in the Team.

You’re probably feeling like you can handle all of this, but this is the part where we like to remind ourselves that business is a team sport, and businesses that forget that lesson don’t stay in business very long.  Lots of businesses fail because they just don’t have the right team with the right skills and talents to execute on their strategy and keep all of the plates spinning in the air on the operations front at the same time.

Everyone has talents, but none of us are perfect, and we all have blindspots.  We can’t be good at everything, so if we want to be successful in a business, then we need to have a strong team that includes people who have strengths that offset our weaknesses.  If you think that there’s a gap on your team, then hang out that help wanted sign and make sure that you’re hiring the right people who have skills that you don’t have yourself.

7. Failing to Adapt.

Once again, lots of businesses can get all of the above perfect and still fail.  How?  Because they’re perfectly adapted to the circumstances in which they find themselves, and then circumstances change but they don’t.  Much as we might wish it were otherwise, nothing is forever, and the only constant is change.  You might have done absolutely everything right in your business given the circumstances, but then the circumstances will change, and you’ll have to adapt if you want to survive.

So make sure that you’re constantly scanning your environment and looking for things that could change and have an effect, positive or negative, on your business.  If it’s a change that could negatively affect your business, then how could you respond as rapidly as possible to mitigate that negative effect.  If it’s a positive change, then focus on trying to take advantage of that change to take your business to the next level.