The fear of small business failure is certainly a big hurdle to becoming a business owner. However, by understanding the common reasons for business failure, you can plan to avoid them. Check out these top 5 reasons why businesses fail.
In almost every neighborhood, there’s a storefront that seems to house a new business every six months or so. A comfort food breakfast café, a tiki-themed karaoke bar and then a nail salon all set up shop and then quietly leave before many people can make good on intentions to pay homage to a new local joint.
You’ve likely experienced a similar sight in your own community, and it’s a reminder that small businesses can come and go in no time at all. While it’s true that small business failure rates are about 20 percent in the first year and rise to 50 percent by the fifth year, the ever-changing business on the corner fails to tell the whole story.
In most cases, there are a few finite mistakes companies make that lead to business failure. The good news is, being able to recognize these mistakes and having a plan in place if something occurs can get you back on the path to long-term success. Here are a few of the top mistakes made by entrepreneurs that can lead to small business failure.
1. Taking on Too Much Debt
In some cases, taking on debt is necessary to finance the launch or purchase of a business. However, business owners who don’t prioritize repaying debt and making timely payments inevitably find it hard to grow their operations. According to Guidant’s 2018 State of Small Business survey, entrepreneurs across all industries report a lack of capital or cash flow as a top challenge when running their business, and the weight of debt can make it even more difficult to operate in the black.
To avoid being plagued by debt, more and more business owners are using alternative funding methods like crowdfunding, portfolio loans and even 401(k) business financing to start their ventures. The latter allows business owners to use their existing retirement funds to start or buy a business without incurring tax penalties or taking a taxable distribution. Also known as Rollovers for Business Start-ups or ROBS, 401(k) business financing was used by 22 percent of business owners in 2017, according to our State of Small Business Survey, and it’s becoming increasingly popular for entrepreneurs who don’t want to take on large loans. In fact, ROBS can also be used as a down payment on a small business loan, allowing business owners to preserve their personal savings and even decrease their monthly payments.
Learn more about combining using 401(k) business financing as a down payment on a loan in our downloadable eBook.
2. Poorly Managing Cash Flow
As a business is growing and scaling, it’s important that accounts receivables are managed to focus on cash flow. When companies fail to make adjustments to cash flow while they’re growing, it’s more likely they’ll run out of operating capital — making it impossible to keep ahead of invoices and paying employees. Guidant CEO David Nilssen suggests providing incentives for clients to pay in lump sums early on when having cash on hand in vital. Once you’re a few years in and things are moving more steadily, you can pivot to a monthly or quarterly payment system.
3. Lack of Online Presence
You’ve heard the old adage that location is everything, but for most businesses, today’s most important ‘site’ is their website. Even companies that don’t participate in ecommerce can’t ignore the need for a strong online presence. When your customers can’t find you online, they’ll give up and go to one of your competitors. In fact, if your company doesn’t appear on page one of a Google search, 91 percent of consumers won’t find you because they don’t go to page two.
Fortunately, there are a few simple steps you can take to improve your online presence. These steps include registering for Google My Business, a free service through Google, which helps users easily find your location and hours; signing up for a Yelp Business Page or another trusted review site; and investing the time in applying some basic SEO principles to your site.
4. Ineffective Leadership
We’ve all had a bad boss before, but hopefully that boss wasn’t in charge of running the company — and if they were, you probably didn’t stay around for long. As a business owner, your employees, vendors and clients will all look to you as a reflection of the business as a whole. While no (reasonable) person expects you to be perfect, there are a few small business leadership skills you must master in order to effectively lead your team and keep your business running. From day one, work to set a clear, consistent vision for your team, communicate often and effectively, give and receive feedback and understand how to execute. These skills are sometimes easier listed than done, but you can always seek help from a professional business coach or trusted mentor — the success of your business may depend on it.
5. Trying to Do Everything Yourself
Steve Jobs once said, “It doesn’t make sense to hire smart people and then tell them what to do…” There’s a lot of wonderful wisdom to be learned from this advice, it should help you see that, as a business owner, your time can’t be spent micromanaging.
Even though your business is surely your pride and joy, there are parts of it you absolutely need to let go of to be successful. In other words, you should be working on the business, not in the business. Otherwise, you face the risk of burning out, losing sight of the greater direction of the company or worse — both.
Even if you’re not in a place to hire a wonderful, full-time team, there are tasks you can outsource. In our State of Small Business survey, business owners reported tax preparation as the No. 1 most outsourced service — sounds like something you could gladly let go of, right?
It’s true, some small businesses will fail. But a fear of failure shouldn’t stop you from pursing your dreams of entrepreneurship. The keys to avoiding small business failure include having a plan in place, learning from common mistakes and always improving.