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Reasons a Small Business Fails and How to Avoid Them

Part of starting and running a successful company is understanding business failure and how to mitigate it. Learn more in this article.

Starting and growing a successful business isn't an easy feat. Small business owners must continually strive for success or risk failure, especially because statistics on the small business failure rate isn't too encouraging. According to the Small Business Administration, roughly 33% of small business start-ups fail in the first two years, around 50% go under after the five-year mark, and around 33% survive for ten years or longer.

So, what exactly is business failure? 

When a business fails, it ceases its operations because it cannot generate sufficient profits or revenue to cover expenses. Essentially, it runs out of money. 

Common reasons small businesses fail

To ensure the longevity of your business, it's necessary to understand the reasons for business failure so you can mitigate them. In this article, we'll highlight some common reasons why businesses fail and how to avoid them.

Financial challenges

To run a successful business, a business owner must be in tune with how much income is generated by sales of products and services and balance it off with the cost of day-to-day operations. For most failed companies, there's a disconnect between revenue and expenditure, leading to funding shortfalls that can quickly wreck a small business.

Also, businesses just starting out struggle to secure financing to fund an expansion, promote new products, and run marketing costs. Even with funding options like conventional bank loans, angel investors and venture capitalists available to small start-ups, not every business has the growth trajectory or revenue stream required to guarantee significant funds from them.

Without proper financing for ongoing working capital needs and expansion projects, small companies have no option but to shut down operations.

Poor management

One of the main reasons for business failure is inadequate management. Most new small business owners usually exhibit managerial inexperience in areas such as finance, production, purchasing, selling, and hiring and managing employees. If, as a business owner, you do not quickly identify where you're lacking as a manager and seek help, your business may fail.

Inadequate management can also be in the form of neglect. Small businesses risk failure when owners become complacent and fail to plan and oversee all business operations activities. This should include keeping up with current market trends and consumer data.

Lack of an effective business plan

Starting and growing a successful business goes beyond your passion and imagination; it requires thorough, methodical, strategic planning and hard work. It's essential for companies to have a solid business plan, as many businesses fail due to fundamental shortcomings in their business planning. Your business plan must be pragmatic and based on current and accurate information and educated projection for the future.

The lack of a business plan can also become a stumbling block when securing funding. Most banks and investors require a clear and convincing business plan before approving financing.

No market demand

Even with a foolproof business plan and optimized managerial skills, your business will struggle without the demand for your product or services. According to Statista, 35% of small businesses fail because there's no market need. Therefore, you must conduct thorough market research about the industry and niche you wish to cater to. Find answers to questions like:

  • Who is your target market?
  • Is there a demand for the solution you're offering?
  • What is your value proposition?

Marketing inadequacies

In the early stages of start-ups, some business owners fail to consider the marketing needs in terms of the budget required, target market, and accurate projections. When the budget allocation for early marketing campaigns falls short, it can be tricky to secure funding or redirect funds designated to the running of other departments.

Implementing an effective marketing strategy is very important to a company's success. Therefore, it's necessary to set realistic budgets for current and future marketing needs. Also, having realistic projections regarding prospect reach and conversion ratios is vital to the success of a marketing strategy.

How to avoid business failure

While identifying why businesses fail is good, your goal should be knowing how to avoid them. Here are some practical ways to avoid business failure:

Avoid poor management

Enroll in training, find a mentor, learn, study, conduct personal research — do what it takes to improve your leadership skills and industry knowledge.

Avoid misappropriation of funds

Take advantage of professional business accounting software like Xero or Quickbooks to manage financial records, including income and expenditure, and use the information to generate profit and loss statements. Alternatively, if you lack financial management skills, consider hiring a professional bookkeeper, certified public accountant, or small business advisor to help manage your reports.

Rethink your business plan

Start by doing extensive market research on your industry and competitors. Then create an all-encompassing business plan that includes financial forecasting based on effective marketing, predicting income, and management solutions to overturn potential setbacks and competitor activities. Use a milestone chart to track success, tackle problems as they occur, and keep all operations in check. A great business plan incorporating the best business practices can help you avoid failure.

We've discussed why businesses fail and how to avoid them, but sometimes it’s too late, and that’s okay. Rather than watch your business fail completely, you can opt to sell your business to people who are better equipped to run and scale the business. You can read our guide on selling a failing business to educate yourself on what to expect and how to facilitate a smooth transition. And when you do decide to sell your business, you can take advantage of our advertising platform as we help you gain access to serious buyers interested in your industry.

Megan Kelly

About the author

Megan is Head of Content Marketing at She is an expert copywriter and content marketer.