5 Reasons Why Small Businesses Fail

For every founder that manages to bootstrap a startup, eight out of 10 will fail within the first 18 months, according to Bloomberg. A whopping 80% will crash and burn. About half of all new establishments survive five years or more and about one-third survive 10 years or more, reports the Small Business Administration. The probability of survival increases with a firm’s age. Survival rates have changed little over time.

According to Infusionsoft, 83% of the 28 million small businesses in the United States are solo entrepreneurs who do less than $100,000 in annual revenue, while 6.1% generate between $100,000 and $300,000 in annual revenue, and another 6.8% make between $300,000 and $1,000,000 in annual revenue.

Here are 5 main reasons why businesses fail:

1. Not understanding what business they’re in. Think Blockbuster which thought it was in the entertainment distribution business, but it was really all about retail customer experience. Not acknowledging that fact made it easier for Netflix to swoop in and dominate the home video rental market. Failure to embrace new technologies and new developments is also the downfall of companies. In a fast changing world, leading businesses are those that make best use of advanced modern technologies in an appropriate way.

2. Running out cash. Having insufficient funds is a major downfall of many companies, which can be due to a number of reasons from not budgeting properly to failing to plan how long it takes to raise rounds of funding. Business is cyclical and bad things can happen over time such as the loss of an important customer or critical employee, the arrival of a new competitor, or the filing of a lawsuit. These things can all stress the finances of a company. If a company is strapped and doesn’t have a cash reserve, it’s not likely to recover.

3. Poor management team. Angel investors and venture capitalists often say that they invest in a company’s management team. Weak and inexperienced management is one of the major causes of business failure. Add to that equation in-fighting partners and unhappy employees. Good management requires focus, vision, planning, and standards.

4. Failure to solve a problem. While the saying goes “there’s nothing out there hasn’t already been invented,” your product or service should help solve a problem or offer a better solution than what’s already out there in the marketplace. Also, oftentimes someone will come up with a great business concept but not a complete product that consumers will actually buy and use. Other businesses fall apart when the initial business model fails.

5. Grow too quickly. Some business owners will confuse their company’s success with how quickly they can expand their business. This leading cause for bankruptcy can be avoided if business owners concentrate more on slow and steady growth. Once a solid customer base is established and steady profitability exists, then the business can seek to work on development and expansions plans.