Why small businesses fail

Why small businesses fail

7 reasons why small businesses fail

Running a successful small business is incredibly difficult. Few people have the skill, stamina, and grit to survive over the long-term, which is why it’s a well-known fact that most small businesses fail within their first five years.

Then Covid came along and made things even worse:

Growth within NZ’s small business sector has stalled and is down around 40%, according to a study by a professional accounting body released in March 2021. NZ’s small businesses are struggling compared to global counterparts, were ranked third-to-last in the sample group of countries for overall growth, and less than a third of Kiwi businesses reported any growth at all. Perhaps that is unsurprising given our nation’s heavy reliance on areas such as tourism and international students. Though worse still, the year before Covid struck only half of NZ’s small businesses achieved any growth!

So, what does it take to become the exception to the rule? Why do so many entrepreneurs fail, and how can you avoid their ranks?

As you contemplate going into business for yourself or explore the risks in your existing business, beware of these common pitfalls and traps.

Wrong reasons to start a business

Before diving into specific reasons for business failure, it’s worth pausing to note that most people start businesses with a poor ‘foundation’.

Most of us have a woefully inaccurate impression of entrepreneurship. We see only the success stories like Musk or Zuckerberg — because they’re the ones that get reported in the media. No one wants to read case studies about failed businesses. So we don’t hear about them, even though they make up the majority of business attempts.

Entrepreneurs tend to start their own businesses for two overarching reasons: money and freedom. They think they’ll earn a great deal of money quickly, and they love the idea of “firing their boss” and working for themselves. But, starting a business comes with high risk, no certainty of getting paid, and plenty of stress. If you want money, there are plenty of other ways:

These options don’t require the risk, stress, and long hours that entrepreneurship does.

Which raises the second point of chasing freedom. Eventually, if your business survives long enough, you can create a degree of freedom to work when and how you want. But starting a business requires longer hours than working a 9-to-5 job does.

The buck stops with you. You have to wear every hat at first, from marketing and sales to accounting and bookkeeping to actually creating whatever it is your business sells. You work harder than employees work, often with little to show for it at first.

Why most small businesses fail

As you set off on your journey toward profitability and expansion, watch out for the following snares and missteps that trip up so many of your fellow small businesspeople.

1. Run out of money

Accountants might call this being “under capitalised”.

In entrepreneurial circles, a common metaphor is a plane building up speed on the runway, trying to take off. Often entrepreneurs look for ways to “extend the runway,” to find ways to survive until profitability.

2. Poor market research

Imagine going through all the work to create a product or service, launch a business, create comprehensive marketing campaigns, and spend a ton of money on advertising — only to discover no one wants what you’re selling.

Or to discover that someone else is already selling something even better, cheaper, or faster than you can offer. It’s a recurring theme for why so many businesses fail.

3. Not enough of a niche

Doing market research and competitive analysis isn’t fun, largely because it bursts your balloon. You realize just how apt your competitors are and how crowded the existing market is.

Too many entrepreneurs aim for the widest possible market — the largest pool of potential customers. They try to be everything to everyone to capture as broad a portion of the market as possible. And in doing so, they play to their competitors’ strengths.

Resist the urge, and go in the opposite direction.

4. Personal crisis or circumstance

Not all businesses fail for business reasons. Many fail because of personal reasons, such as health crises, divorce, or a rift between business partners.

Take health crises, for example. It takes incredible stamina to run a business. If a health crisis hit you and you had to stop working or scale back your hours, could your business survive?

For that matter, yours isn’t the only health that could derail your business. What if your spouse or child got sick and needed more care? Or if your family needs better health insurance than you can pay for as a small-business owner? If you have a partner, what happens if they get too sick to work?

Divorce and business partners falling out can also derail small businesses.

Why small businesses fail

5. Skill gap – marketing and sales

Just because you know how to make widgets doesn’t mean you know how to design and execute marketing campaigns for them. Or how to pick up the phone and do direct sales effectively.

Marketing and sales involve completely different skill sets than whatever you think your core business is. But when you go into business for yourself, marketing and sales become crucial to your success.

Which means you’d better get them right, and quickly.

6. Failure to build the right team

Small businesses are a team sport, even if you don’t plan to hire any employees for a while.

Too many entrepreneurs try to go it alone. They don’t bother finding a mentor or coach, don’t bring on supplemental help for tasks they should outsource, and don’t continuously learn and read within their niche.

As the saying goes, smart people learn from their mistakes; wise people learn from others’ mistakes. Chances are that every mistake you’re likely to make has been made before.

Which means you can avoid making them if you get help.

7. Run out of grit or purpose

Call it drive, motivation, will, purpose, or any number of other words. But there’s something inside you that enables you to get out of bed every morning and rise to the challenges that the day throws at you.

Most people don’t need much of this drive. They get a steady paycheck to compensate them for going through the motions of their daily grind. It’s enough for them.

Entrepreneurs don’t get a steady paycheck, and their grind is infinitely harder. They face countless challenges that employees don’t, with no guarantees that they will surmount them. Any one crisis could shatter their business — and entrepreneurs face a never-ending string of crises, week in and week out.

Sometimes entrepreneurs simply run out of drive. They know life is easier as an employee, and in the low moments, the simplicity of clocking-in to a regular job and steady paycheck calls out like a siren song.

The bottom line – why small businesses fail

We’re inundated with success stories about people who hit it big by becoming their own boss. But when you dig into these stories, you rarely get any type of useful tips on how to become a successful entrepreneur.

More often than not, new business owners fail. But if you avoid the common reasons above, your chances of success go up dramatically.

When in doubt, get expert help from people who have already succeeded. You don’t need to reinvent the wheel, and you don’t need to make every mistake in the book on your own. Avoid the most common mistakes because you’ll surely make plenty of unique ones in your own business as well!