Starting and operating a small business can be a rewarding journey filled with excitement as you make your mark in the world through business. But not everything about running a small business will be a walk in the park, and your voyage toward entrepreneurial success can be filled with ups and downs, learning curves, uncertainty, and disappointment. In fact, statistically speaking, many new small businesses will be destined to fail. According to the Small Business Administration, approximately 20% of US businesses will fail within their first year, and roughly 30% will fail their second year. From here, the numbers get even bleaker as approximately only half of companies will survive their first five years, and only about a third will make it to 10 years.
Business Failure Statistics in the First Several Years of Business:
- Roughly 20% of businesses fail within the first year
- Approximately 30% of businesses fail within the second year
- About 50% of businesses fail within the first five years
- Approximately 66% fail within the first ten years
- Roughly 75% of businesses fail within the first 15 years
While overcoming these statistics may seem daunting to the new business owner, it is by no means impossible. By analyzing these success and failure statistics, new small business owners can gain more insight into the challenges that lie ahead and prepare themselves to overcome the adversities they will most likely meet in the future. In this article, we will cover some of the main reasons why small businesses fail and some of the main reasons why they succeed.
Reasons Why Small Businesses Fail
There are a wide variety of reasons why a small business may fail. By analyzing and considering these issues while formulating your business plan and running your company, you will be more likely to avoid their adverse effects or better handle them if and when they arise. Here we will list some of the most common problems that result in businesses closing their doors for good which include the following:
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No Market Need
Have you ever heard the saying, "Nothing is more powerful than an idea whose time has come?" Unfortunately, for many small business owners, the opposite is also true. You may think you have the greatest idea, product, or service in the world, but if the market does not need it or is not receptive to it there will be little to no demand for it. If you cannot convince consumers of your business's value, it will be impossible for it to gain traction and succeed long-term. Doing thorough market research and market testing can help you predict how consumers may react to what your business offers. This allows you to refine your ideas and make any necessary tweaks or avoid launching a business that is likely to fail in the first place. Doing this preliminary market research can save you time and money and, if need be, lets you go back to the drawing board to redirect your efforts toward better business ideas.
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Lack of Financial Resources
Another widespread reason why a small business may fail is a lack of financial resources. Even if the market needs what your company offers and is receptive to it if you have problems financing your business you are likely to run into issues. Hiring employees, paying for advertising, and renting a retail or office space can all cost a considerable amount of money. If you do not have the funding to pay for these expenses, your business may not be able to continue to operate. Common reasons businesses face a lack of financial resources include the following:
- Lack of sales revenue or income
- Failure to secure investors
- Not approved for business loans
- Mismanagement of financial resources
- Rising cost of rent, supplies, or employee wages
Ensuring your business has adequate funding can prove to be a challenging task, and there are a number of financial mistakes that new companies are likely to make. But outlining a reasonable financial strategy in your overall business plan and setting realistic and attainable profit margins can help you avoid financial issues and provide adequate funding to operate your business.
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Inadequate Business Partners or Employees
Some businesses may have a good business plan, excellent market viability, and plenty of financial resources in order to succeed but may lack the chemistry and cohesiveness amongst the members of their own company in order for the business to reach sustained success. Infighting, inconsistent vision, and incompatibility amongst business partners and co-owners can lead to business failures. There are many things to consider when building a team from scratch; problems with employees can cause major issues within your company and with your customers. Alternatively, not being able to find enough qualified or capable workers can ultimately lead to business failure.
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Harsh Competition
Many businesses will simply not be able to survive due to harsh competition in their marketplace. Many competitors will be larger and can operate at lower profit margins based on the volume of customers they have, effectively pricing out smaller competitors and pushing them out of the marketplace. This is common in many industries as more prominent companies dominate the market to the point where smaller businesses may not even attempt to enter the industry. However, this allows smaller companies to carve out niches that can service more specific needs that are not always able to be met or are overlooked by their larger competitors. Competing in oversaturated markets or against companies with high levels of experience or many industry connections can also pose problems for new companies starting out. Again, thorough market research can help serve your best interest in regard to competition in your area of business and help you find a niche and a good market within your industry.
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Inadequate Online Presence
A common mistake many small businesses make is not investing enough time and resources into building their online presence. Many companies starting will create a simple website and Facebook page but then will quickly allow them to fall into neglect, fail to maintain them, upload new content, or even check their emails, messages, and comments. Even worse, some companies fail to create a website or social media presence entirely. By not taking full advantage of having a website and the various social media platforms, you can severely limit your reach. This can hand over many potential customers to your competitors who do adequately use the internet to promote their companies, giving them an advantage.
Businesses should put a strong emphasis on implementing online marketing strategies which can include a dynamic and professional-looking website, an industry-related blog, and different social media accounts. Additionally, creating and optimizing a Google Business Profile can help boost your local SEO ranking and allow customers to find you more easily using apps such as Google Maps and Google Search.
How Do Small Businesses Succeed
For those small businesses that have survived their first several years, what elements made the difference and allowed them to succeed? These are some of the common factors and practices small businesses that have reached prolonged success implement in their companies:
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Good Customer Service
Providing customers with excellent customer service communicates to them that you value them and care about their customer experience with your company. Going the extra mile, answering emails promptly, and handling customer complaints effectively will help ensure that you have a good reputation amongst your customers. Satisfied customers are likely to be return customers, recommend your company to friends and family, and leave positive reviews on online platforms. Many companies do not put a strong enough emphasis on providing good customer service and this can hurt their business. Creating customer loyalty programs that provide rewards or discounts to repeat customers can help solidify a strong customer base and instill a sense of excitement and affinity around your company among your customers. Please view our series of articles on exceptional customer service.
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Conducting Market Research and Creating a Detailed Business Plan
Good research, planning, and strategy can go a long way in helping you guide your small business toward success. Market research is one of the single most important things new companies can do while getting started. There are certain things to know before you start your own business. Diving into the details around the financial resources you will need, the demand there is in the marketplace, and how long it will take you to reach profitability can help remove uncertainties in your way and clear your path towards your desired outcomes. While not every business that makes it past the 10–15 year mark starts out with a detailed business plan, creating one will certainly not hurt your chances at success. Additionally, presenting detailed business plans could be instrumental in securing investors or business loans that can help finance your company.
The more market research and business planning you do, the more you will understand your industry and how to operate within it to attain success. By creating and following a detailed business plan, your track to success will be laid out ahead of time and you will always have something to focus on that will bring you closer to your goal. However, sometimes you will need to evaluate your current situation and make changes to your existing plan to reach long-term business success. By conducting consistent research you will be better capable of making any necessary and rational adjustments to your business plan. This can help you become more adaptable to the changing circumstances of your industry. Market research and planning are two of the most powerful tools you can use to help advance your business and increase its chances of reaching long-term survivability.
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Good Marketing Strategies
A strong focus on marketing can be instrumental in helping your business make valuable gains in the marketplace and gain a foothold with consumers. You can have great products or services, but your business will struggle if no one knows about your company. Implementing creative and effective marketing strategies can be a fun and engaging process and one that will pay off and help your company reach sustained success. You can use many marketing strategies effectively to help promote your company, such as email marketing and SMS marketing. However, there are several common marketing mistakes new companies make. You can avoid these mistakes by adequately researching how to market your business or hiring a marketing consultant or marketing firm. Please read our Low-Cost Business Marketing Ideas article series to learn more about various marketing strategies you can use for your business.
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Hire and Retain Quality Employees
While you may be excited to hire the employees you may need to get your new business up and running, it is important to take extra time or invest additional money in employees' salaries or wages to find the right high-quality employees that will be dedicated to helping your business succeed. While conducting your hiring process, it's a good idea to look out for the right qualifications, a good work ethic, the ability to work as a team member, and a positive and professional attitude. The right employees can help take your company to the top, and retaining high-quality employees is also important for continual success. By utilizing positive reinforcement with your employees and giving them praise and recognition for a job well done, you can increase employee engagement, which can increase their overall productivity and your profitability. In addition, offering employee perks and benefits can also help create a positive work environment that your employees are happy and proud to be a part of.
Content employees will be more engaged with their work, customer satisfaction oriented and committed to your company. By focusing on ways to keep your employees happy, you will also be investing in your company's success.
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Remain Persistent
One of the most critical aspects of achieving long-term success as a business owner is being able to remain persistent. Even if this means persistently adapting to new technologies, changes in your industry, or even changes in the nature of your business. Some businesses start as one thing and then morph over time into something completely different. Even companies that have a well-established identity, clear-cut goals, and a well-defined mission will adapt and change how they operate over time. The common denominator that equals success in both of these instances is persistence. Showing up every day, putting in the work, and doing the things you think can bring you success, even in the face of adversity, will help you overcome the challenges and obstacles in front of you. If you get knocked down, you can get back up. And try again. This type of mentality is what can set you apart as a business owner and allow you to realize your vision and achieve your goals.
Final Considerations
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Operate Legitimately
Another essential aspect of running a successful business that can withstand the test of time is operating your business legitimately. This includes forming a legally recognized business entity, having all necessary business licenses and permits, obtaining an employer identification number (EIN), having a designated registered agent, and more. Establishing your business in these regards is critical from the very beginning of creating your business. This is because registering your business under a separate business entity — such as a limited liability company or corporation — can give you legal and financial protections that can help shield your personal assets. For example, suppose you are operating your business as a sole proprietorship that is not recognized as a separate legal entity. In that case, you can be held personally responsible for any financial or legal problems your company may face, which can impact your personal assets. Additionally, the ways in which these business entities are taxed and structured could be beneficial to your company.
InCorp can help you determine which type of business structure would be the most beneficial for your particular company and can also help you throughout the entire process of forming your business entity. We provide business entity formation and incorporation services as well as registered agent services; which will be required when you officially register your business. Additionally, InCorp also assists businesses by helping them manage their business entities through our business entity management system and our iOS app. These tools can be utilized to help you stay on top of calendar events including due dates, order and payment history, and other important business matters.