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Why Small Businesses Fail: 10 Big Pitfalls to Avoid

A small business is defined as an independent business with less than 500 employees. That's a big margin when you think about the fact that there are about 32.5 million small businesses in the U.S., and of that, 81% or 26.4 million firms don't have employees.

  • 20% of U.S. small businesses fail within the 1st year

  • 67% of small businesses survive at least 2 years

  • 48% survive 5 years

  • 33% survive 10+ years

These numbers can be a little scary, but don't let them kill your dream to become a business owner. If you take the time to understand the mistakes others have made, and create an actionable plan for your business, you can avoid following in their footsteps.

Here are the 10 Big Reasons Why Small Businesses Fail:

1. No clear business plan or effective marketing strategy

It's easy enough to start a small business, and depending on your industry, it might not even require much of a financial investment.

This can actually be a pitfall for some business owners because they're so excited with their new idea that they don't take the time to create a clear business plan, or strategy to market their business.

Ideally, even if your business does not require a loan to get started, you should still treat it as if you are asking for one.

This is because all startups require time, and without a plan for how you'll spend your time, you'll spend time without a return on your investment.

Frame it in your mind that you are asking yourself for a time loan, and create a business plan that includes:

  • Executive Summary - This should kickoff your business plan and cover the main focus of your business, a brief description of your offer, ownership structure and a summary of your plans. Pro Tip: Do this part last. It will be easier to write a summary after you've completed the other sections.

  • Company Overview - This section should detail important information including its registered name, address of any physical locations, key people in the business, history of the company, what you'd like to accomplish in the short-term and long-term.

  • Industry Analysis - In this section you'll want to detail information about your industry to help minimize risks and take advantage of potential growth opportunities. Is there something in your industry you don't agree with? How can you use this to differentiate yourself?

  • Customer Analysis - "Everyone" isn't a market. It's important that you have a specific group of customers in mind so you understand their needs and can clearly state how your offer satisfies that need. You can also include where they live, the problems they face, and what they care about, so you can write your marketing copy with a specific audience in mind.

  • Competitive Analysis - With this information you can identify gaps in the market and ways to differentiate yourself. Focus on visibility in search results, target customers, what makes your competitors unique, what's their offer & how well do they communicate it, what's their price point and discounts they're promoting? For help on conducting a competitive analysis, read this.

  • Marketing Plan - This is one of the most important parts of your business plan, and for many new businesses, is often the weakest. Saying that you'll promote your business on social media, or that you'll build a website is a part of a plan, but not a strategy to get more business. Marketing is all about starting conversations. It's less about how you share the message than how it helps the customer. What's in it for them? Why should they trust you? Great marketing educates, encourages and builds a community.

  • Operations Plan - Here you'll want to detail your objectives, goals, procedures and timeline. It's helps to encourage you to think about tactics and deadlines. Be sure to include who is in charge of completing specific tasks, what each department is responsible for, where daily operations will take place, when tasks and goals will be completed, how much money department will need to complete their tasks.

  • Management Team - Who will be taking on essential responsibilities within the business. Describe their educational background, employment history and relevant information. If it's just you right now, that's okay! Still complete this section, as it can help you identify potential strengths and weaknesses.

  • Financial Plan - This will help you determine if your business idea is sustainable, and will keep you on track as the business grows. In this section you'll want to have a cash flow projection, income statement and a balance sheet. It's much easier to reach goals by first establishing what the goal is and working backwards. This can help you make sure you're charging enough for your services or product, and if policies need to be updated to better protect yourself from too many accounts receivables.

2. Lack of demand for the product or service

This is something you'll want to spend time researching before you devote time and money into starting up a business. When you're first starting out, chances are that your business model will need some tweaking.

Ask yourself these important questions to validate the need for your offer:

  • What problem does my potential customer have?

  • What's my solution to that problem?

  • Why would my potential customer pay for this solution?

Again, we're focusing on what's in it for the customer.

With the answers to these questions, you can then create a unique selling proposition.

For [your target customer] who [need or opportunity] our [product or service] is [value or solution to problem].

3. Don't listen to customer needs

One of the big keys to success in a relationship is communication. How you do it, the frequency in which you it, and what you say when you do it all builds towards setting expectations for that relationship.

People want certainty, especially when they've paid for something with an expectation in mind of what they'll get. So, if there's an issue or an expectation can't be met, communicate as soon as possible so the customer has time to prepare.

Take time to listen to your customers and make a note of their feedback. You can then revisit your notes and see if there's a pattern.

If there is, then you can figure out how to improve your business to provide a better experience.

4. Cash flow problems

Few businesses maintain a consistent revenue throughout the year, but if you're struggling each month to pay the bills then you might have a problem with cash flow.

Here are a few tips to help you solve cash flow problems:

  • Create & stick to a monthly business budget

  • Access a business line of credit

  • Invoice promptly & offer a discount for prompt, upfront payment

  • Reduce expenses

  • Raise your prices

  • Upsell & cross-sell (you've probably seen this with ecommerce with phrases like "you might also like...")

  • Accept credit cards, online payments & offer financing through a 3rd party

  • If you sell products, use an inventory management system to keep track of on-hand inventory

5. Not charging enough for your product or service

One of the quickest ways to increase your revenue is by raising the price for your product or service.

Price for Products

If you're struggling to set the price for your product, remember, just because it's the price you use to launch, it doesn't mean you have to keep it at that price forever.

To establish a price for your product, add up all of the costs involved to bring your product to market, multiply this by your profit margin, and this will give you your product price.

Price for Services

If you're not sure how to determine pricing for a service, add together your total costs (break even cost) and then multiply this by your desired profit margin percentage. Take that number and add that amount to your costs.

Profit margins vary by industry, but if you're not sure what your profit margin should be, take into account your costs, time required to prepare for & deliver the service, the market, your perceived value to calculate a healthy profit margin.

Another way is to set a revenue goal for the year, divide that number by billable hours available and that's the hourly rate you should charge to meet your goal.

6. Insist on doing everything yourself

Even Superman needs help from the Justice League from time to time.

Getting yourself stuck in fulfillment and day-to-day tasks is a trap that will keep you from working on your business. It's important that you recognize your strengths and weaknesses, so you can outsource or delegate tasks that drain you.

As the owner of your business, you can set healthy boundaries for yourself.

The longer you spend doing things you're weaker in, the less time you can spend improving and optimizing your business. It's also a quick way to burn yourself out.

7. Not researching the competition

This isn't just a 1x thing you do when you create your business plan. You'll want to keep an eye on the competition on a regular basis.

A lot can happen when you're not watching. They might move to another location, stop providing a core service, or make a major change that has a lasting impact.

Knowledge is power, so even if you want to say "I don't really have any competitors because what we do is so unique" still take time to do some searches every so often.

This will help you have optics on potential differentiators, as well as opportunities in the market.

8. Refusing to pivot or change

Einstein's definition of insanity is doing the same thing over and over again and expecting a different result.

If you're unhappy with where your business is, and you're not getting the results you'd hoped, you have to change something.

It might be hard and it will probably be uncomfortable because that means that you're stepping out of your comfort zone and doing something new.

Don't let your pride get in the way of your success. Join a business group or a mastermind so you can talk it through with trusted peers, identify where you're stuck and find a professional to help you, or schedule time to take a hard look at your business plan to see what area you need to improve.

9. Lack of optics on their data

You can only get so far trusting your gut. At the end of the day, you're going to need to know your numbers because they are the facts that shape your reality.

Much like a car, a business will have several important optics within their business dashboard that tells them how they're performing, if maintenance is required, and if they're on track to reach their destination.

Don't make important decisions blindly. Make sure you have optics on your website and marketing efforts, as well as other key performance indicators for your business.

10. Fear of having a personality

Nowadays, if you don't stand for something, you will not stand out. This doesn't mean you have to get super political, or share every thought that pops into your head, but people now expect businesses to have an opinion.

Whether it's opting for a 4 day work week to live a more balanced life, or communicating the why behind your process, share these things - it's okay to be human.

People do business with people. So if you can humanize your business and put a face to the name, it's going to be easier for people to connect with you.

Pro Tip: Don't feel like you have to hire a professional photographer - iPhone is fine. Done is better than perfect!

Starting a new business isn't easy. It takes an idea, courage, and careful planning to not only make it a reality, but to ensure that it lasts.

If you have any questions about how to create a marketing plan for your business, or where to start with your website, schedule a free strategy call with our team.

We look forward to learning more about you and your business!


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