6 Major Causes of Small Business Failure

Guest post by Patrick Del Rosario. To gain exposure by partnering with us, read our write for us guideline.

When a business fails, it can be hard to look at things objectively; particularly when it’s something you put your blood sweat and tears,
and savings into. Recent statistics released by the Small Business Administration showed that seven out of ten start-ups last at least two years, while 51 percent survive for at least five years.

These statistics are certainly better than the fatalistic “95% of small businesses fail within one year” statement that you have undoubtedly had thrown at you at one point or another. However, it does show that a significant number of small businesses do fail, so the question is why is there a high rate of small business failure.

Understanding where the problem lies is the first step to finding a solution, but many business owners have a misconstrued idea of what went wrong, which may prevent them from coming up with a viable recovery plan.

It’s easy enough to blame the economy, the government or your business partner for the failure, but more often than not, the real problem is slightly more complex than that.

There are a number of different factors that frequently play a role in the downfall of a business, and once you know what they are, you will be better equipped to face the challenges that come with building your business back up.

Here the 6 Major causes of small business failure you should avoid;

1. Lack of capital

Starting out with insufficient capital is one of the most common reasons that small businesses fail. If you have underestimated the cost of opening and running a business, you are already doomed before you ever had a fair chance.

Banish any unrealistic expectations you may have about how much profit you can make, especially during the first few years while you are working to build up a good customer base. It is vital to ensure that you have enough money to carry you through the first few years when you may not yet be making enough to cover your expenses.

2. Bad accounting

If you don’t have your numbers sorted out properly, you will have no way of knowing how well things are going and what your next step should be.

The reason that business owners so often lose track of their numbers is that they hire an outside person or firm to do all of their taxes. They then feel they can relax and trust the accountant to mind the business’s numbers.

It’s not that you shouldn’t hire an accountant — you should! But business owners must always be fully aware of what the numbers are like in order to steer the company in the right direction.

3. Poor management

Starting a business is more than just a matter of having sufficient capital, it requires excellent management skills, something many new business owners are lacking.

If you don’t have experience with running or managing a business, it is crucial that you at least have some relevant education under your belt. Managing a business involves hiring, delegating, doing market research, managing finances as well as purchasing and selling.

All of these things take time to learn, and if you start out without many or any of these skills, you may be personally responsible for the failure of your business. Therefore, this is a very important reality if you wish to avert small business failure.

4. Wrong location

You can do everything right, but if the location is simply not suitable to the type of business you are running, it won’t do you any good.

When picking a location for your business, think of things like where most of your customers are, whether the location is easily accessible and has sufficient parking and lighting, take into consideration where your competitors are, how safe the building is and what the history of the community is.

All of these things play a big part in the success of your business, and if you don’t feel that the conditions are right, it may be time to look for a new location.

5. Over-expansion

Inexperienced business owners often make the mistake of thinking that because their business is successful; they can afford to expand at a faster rate. Unfortunately, expanding too quickly or into the wrong markets will almost surely lead to bankruptcy.

The best way for a business to grow is slow and steady. Don’t try to move forward until you are ready and have sufficient capital to do so. Taking a loan to expand can be dangerous if you haven’t yet established a solid customer base and have a good cash flow.

6. Lack of online presence

More recently, small businesses have found it hard to compete with established companies because they do not put enough effort into building up an online presence. Do you want to avoid small business failure? Then build a strong online presence – hire an SEO services professional!

Even if you are not planning to offer your products online, you should at the very least have a company website, and it should be mobile-friendly as well. Later on, if you see the potential, you may choose to sell your products or offer your services online, but the first step is to show your customers what your company is all about.

That said, a bad website can be almost as bad as no website, so make sure you hire an outside company or individual who can put together a well-designed, professional looking and easy to navigate website that will be a joy to all who visit it.

Patrick is part of the team behind Open Colleges. It is one of Australia’s pioneer and leading providers of Accounting courses and Bookkeeping Courses. When not working, Patrick enjoys blogging, travelling, and photography. Patrick together with his father runs a Photo Studio in the Philippines. If you have a blog and would like free content. You can find him on Google+.

Creative Commons Image courtesy of Lucidio Studio