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According to the Bureau of Labor Statistics, over 20% of small businesses fail within the first year. Only 35% of private-sector companies established in 2013 continued to thrive in 2023. That means approximately two-thirds failed during the ten years.
Common reasons small businesses fail to take hold include a lack of capital or funding, retaining an inadequate management team, a faulty infrastructure or business model, and unsuccessful marketing initiatives.
Key Takeaways
- Low capital and funding are a small business’s greatest risk.
- Outsourcing tasks can allow business owners to focus on operations.
- Creating and maintaining an accurate business plan is beneficial for small businesses.
- Poorly executed marketing campaigns can negatively affect revenue.
1. Financing Hurdles
Small businesses can fail due to a lack of funding or working capital. Business owners fund payroll, pay fixed and overhead expenses such as rent and utilities, and ensure outside vendors are paid on time.
Owners of failing companies may overestimate revenue generated by sales of products or services. Companies may underprice a product or service to entice new customers and beat competition in highly saturated industries. Small businesses have little choice but to close down when costs outweigh revenue.
Small companies in the startup phase face challenges in obtaining financing to bring a new product to market, fund an expansion, or pay for ongoing marketing costs. Angel investors, venture capitalists, and conventional bank loans are among the funding sources available to small businesses. The Small Business Administration also offers a variety of loan programs.
2. Lack of Management Skills
A lack of business acumen on the part of the management team or owner can cripple a small business. The owner may have the skills to create and sell a viable product or service, but lacks the attributes of a strong manager and doesn’t have the time to successfully oversee other employees.
Mismanagement can lead to problems with finances, hiring, or marketing. If owners outsource activities like IT support, human resources, or payroll, they can focus more on operations.
3. Ineffective Business Plan
Entrepreneurs should have a solid understanding of their industry and competition before starting a company. Small businesses often overlook the importance of effective business planning before opening their doors. Creating and maintaining a business plan is key to running a successful company for the long term. A sound business plan should include:
- A clear description of the business
- Current and future employee and management needs
- Opportunities and threats within the broader market
- Capital needs, including projected cash flow and various budgets
- Marketing initiatives
- Competitor analysis
4. Marketing Mishaps
Business owners often fail to prepare for marketing needs in conversion-ratio projections. Having realistic projections of target audience reach and sales is critical because it may prove difficult for companies to secure financing or redirect capital from other business departments to supplement the costs associated with marketing campaigns.
What Emergencies Should Small Businesses Prepare for?
Every business has different weaknesses. Hazards like fire, natural disasters, or cyberattacks can negatively affect or close a company. The Small Business Administration and the U.S. Department of Homeland Security offer tips to help mitigate cyberattacks and prepare for emergencies.
What Are Signs That a Business Is Failing?
Signs that a business is failing include small levels or lack of cash, inability to pay back loans or vendors on time, loss of clientele, and an unclear business strategy.
How Do Small Business Owners Fund New Companies?
Business owners commonly establish a realistic budget for new company operations and are ready to provide initial capital from personal savings or loans from family or friends.
The Bottom Line
New businesses face several challenges when they first open their doors. Statistics gathered by the U.S. Small Business Association reveal a daunting failure rate. Running out of money and lack of experience are the greatest risks but new business owners have options to increase their odds of success. The Small Business Association offers and supports several loan programs. Seeking advice and education from experienced professionals can help, too.
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