5 Most Common Reasons Why Small Businesses Fail

According to a study conducted by the Statistic Brain Research Institute, almost 71% of small businesses fail within the first few years.

This is quite unfortunate considering you have invested both time and money hoping for a higher return on investment and business sustainability. Of course, no entrepreneur would want to fail, but it does happen, whether the company is selling website templates or electronic goods online.

To hopefully avoid becoming one of the statistics, here are the five most common reasons why small businesses fail.

1. Lack of good management skills

5 Most Common Reasons Why Small Businesses FailAlmost 30% of businesses fail due to lack of management skills. As an inexperienced manager, you are likely to run a business without principles, code of conduct, vision, or focus.

It doesn’t matter whether the startup is your brainchild, you should hire a qualified and experienced manager.

Lack of managerial experience may include:

  • Poor credit granting practices
  • Inadequate borrowing
  • Lack of a succession plan
  • Inability to create business terms of contract
  • Out of control growth and expansion
  • Poor decision-making procedures
  • Unnecessary disagreements or arguments in public
  • Contradicting unanimously agreed decisions
  • Lack of standard hiring procedures and management structure

A small business facing similar challenges will most definitely fail within the first five years. The best way to avoid these pitfalls if you can’t hire a manager is to find a mentor, conduct personal research, or undergo training.

2. Unprofitable or unrealistic business model

Don’t venture into a business simply because it is trending or if you see other small companies profiting from the idea or business model. You may end up investing in declining markets.

This is common in technology-oriented industry. In most cases, entrepreneurs end up investing in outdated technology or markets having a stiff competition from reputable and established companies.

Focus on a business with proven revenue stream. This will be possible with a good business plan supported with a feasibility study and market research. You may have a good idea, but without a strategic guideline in place, the company will fail within two years of operation.

Always aim to create a unique business model that you can implement without incurring a lot of expenses. Remember, it may take some time before a small company begins to generate income. So, use the limited resources at your disposal wisely.

3. Lack of product differentiation

Lack of product differentiationWhy do you think consumers should buy your products and not your competitors’?

Obviously, it should be due to a company’s strong value position.

That is, small companies introducing similar products to the existing ones but with more value or benefits stand a higher chance of success.

Quite a number of companies do not strive to stand out from the crowd despite the fact that they have great products and services, leading to their eventual failure.

4. Small companies experience operational inefficiencies

This is another setback to small companies. Of course, it is mainly attributed to lack of proper management systems. It is unfortunate to find these companies’ negotiating terms that do not reflect the dynamic economic environment. This renders them noncompetitive and eventually, they have to close the business.

Operations involve all mechanisms and structures that ensure the end user gets the desired service or products. Of course, this can be hampered by different elements of operational inefficiencies such as:

  • Spending too much on elements of production such as rent, materials, or labor
  • Wasted advertising budget
  • Carrying inadequate inventory, and
  • Expanding faster.

5. Inability to fulfill customer demands

Inability to fulfill customer demandsQuite a number of small companies focus on ways to generate more income instead of customer satisfaction. A company that does not offer exemplary technical support will not retain customers.

In the long run, the customer will end up seeking help from other companies that offer the same service. The company shall have lost that one customer who could have been loyal to your brand.

As you can see, there are ways that small businesses can succeed despite the stiff competition they have nowadays. However, proper preparation is mandatory and it all starts from having a good management structure.

More importantly, the success of a company in any dynamic and competitive market is a collective responsibility of all employees and employers.

Knowing these most common reasons why small businesses fail will give you an edge; in your business making website templates (or any other product or service), avoid these situations to ensure the success of your company.

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