The Top 10 Reasons Businesses Fail & How To Avoid It

As an entrepreneur or small business owner, you’re already aware that many startups don’t make it through their first few years of operation, and yet you’ve decided to go ahead anyway. That’s the kind of self-belief and determination that entrepreneurs need to succeed. However, to survive you also need knowledge, sound advice, and a dependable banking partner.

In this blog, we’ll take a closer look at the reason so many businesses close their doors after only a few years in the game, and how you can best avoid repeating their mistakes. We’ll also consider how guidance, careful planning, and smart financial decisions can dramatically increase your chance of succeeding. Read on to learn more.

HIGH BAR: THE REASONS SMALL BUSINESSES FAIL

The first five years of any company’s life are a trying time. According to the U.S. Bureau of Labor Statistics, roughly 20% of startups fold within their first year, and about 30% within two years, while almost half of businesses do not make it through the first five years. With figures like that, it’s important to get behind the statistics and see what’s really going on.

What is causing half of businesses to fail within five years, and, more importantly, what are the 50% that survive doing differently? Let’s explore the top 10 company killers and what you can do to avoid them.

1. No Market

Figuring out if there is a market for your product or service can be tough. What you think is an appealing offering might have little real appeal. If there’s no demand for your offering, your business won’t succeed. It’s crucial to understand what customers want before launching.

How to Avoid: Research your target market thoroughly and tailor your offerings accordingly. Talk to potential customers to gather feedback and adjust based on their needs. Be ready and willing to change your offering to meet evolving customer preferences.

2. Lack of Planning

Getting into business is easy. Staying in business is tough. The difference is often having a solid business plan to guide you through those first few years. Without a well-thought-out plan, it’s easy to overlook your priorities, get distracted, or lose direction. A good plan outlines your business goals, strategies, and financial projections.

How to Avoid: Take the time to develop a comprehensive business plan before starting. Include sections on market analysis, organizational structure, marketing strategy, and financial planning. Get help from other entrepreneurs, small business associations, and financial institutions.

3. Lack of Money

Many businesses fail because they simply run out of money. It’s essential to make sure you have enough to support your business and cover expenses while you build up cash flow. You’ll also need to have reserves to cover unexpected costs or setbacks.

How to Avoid: Secure adequate funding before launching, and consider how much of your own personal savings you are prepared to put into your business. Talk to a respected credit union or bank about financing. Also, find out about grants from local government and business chambers. Be sure to build a financial cushion to sustain your business during slow periods.

4. Poor Pricing

Setting prices correctly is essential to building your margins while staying competitive. Knowing how to price your product or service requires a thorough understanding of your offering, competitors, and your target market. Overpricing or underpricing your product will hurt your business, and rebuilding demand can be difficult.

How to Avoid: Do market research to understand the pricing landscape in your market. Then use cost-plus or competitive pricing strategies to set appropriate prices. Keep an eye on economic conditions and changing tastes and adjust prices to remain competitive and profitable.

5. Poor Money Management

Effective cash flow management is crucial for business success. Businesses struggle when they can’t manage the money coming in and going out. Keeping track of finances helps prevent cash shortages.

How to Avoid: Implement robust financial management practices. Use accounting software to track income and expenses accurately. Regularly review financial statements and adjust spending to maintain a healthy cash flow.

6. Weak Marketing

You might have the best product in the world but without good marketing, potential customers may never hear about it. A professional marketing strategy will attract and retain high-value customers. Give your offering the promotion it deserves.

How to Avoid: Develop a strong marketing plan that promotes your product or service to your target market. Consider both digital and more traditional channels like billboards, printed publications, and sponsored events. Allocate a generous budget for marketing and track your return on this investment. Be ready to refine your tactics as you figure out what works best.

7. Inadequate Management Skills

Whether through a lack of skills or experience, poor management of your business will quickly tell on your operational efficiencies, quality control, and overall employee morale. Getting the skills and knowledge can be difficult when you’re trying to break into a new market, but understanding risks, challenges, and opportunities and reacting appropriately is essential.

How to Avoid: Obtain the management skills and experience you need. Invest in your own business skills and management training or hire an experienced manager. Talk to local small business associations and business development agencies about mentorship programs.

8. Overexpansion

For companies that find early success, growing too fast can overstrain your operation resources or capital reserves. While more revenue is always good, be sure you are growing sustainably, without overwhelming your organization of financial resources.

How to Avoid: Plan your growth carefully and ensure resources are in place well before you need them. Track your growth closely and adjust plans as needed. In some cases, it might be better to slow your growth to expand sustainably.

9. Failure to Adapt

Markets, demand, and the supply of critical parts or services all change over time. Only businesses that have the flexibility to adapt to shifting conditions will survive over time. While it’s important to plan ahead, be ready to change or adapt even your most dearly held assumptions about the market or your business in order to survive.

How to Avoid: Stay informed about industry trends and changes in the market. Read reports and talk to your colleagues, suppliers, and even your competitors. Build flexibility and adaptability into all your business processes. Be ready to pivot fast when necessary.

10. External Factors

No matter how well prepared you are, sometimes factors completely out of your control can make running your business unsustainable. Economic downturns, supply chain problems, or new regulations can undermine even the best planning and the most cautious growth strategies.

How to Avoid: By definition, external factors are out of your control. However, spending the time to build good connections and understand regulatory changes, potential supply chain problems and the impact on your business of the wider economic climate can help mitigate the effect of unexpected external shocks when they occur.

STRONG PARTNERSHIPS, STRONG COMPANIES

One of the biggest factors in determining the success of your business is the relationships you build along the way. That includes your suppliers, mentors, and key customers. However, perhaps your most important partnership is with your credit union or bank.

You need to work with a financial institution that offers a full range of banking services, as well as the specialized merchant services you need to manage high transaction volumes and quickly shift cash reserves. Ideally, you’ll also find a partner who can offer you sound financial advice as your company grows and changes along with economic conditions.

As a startup or small business, you’ll often find a local credit union is your best bet for the business services you need. With deep roots in the local community, financial co-ops like Fibre Federal Credit Union already know where you are coming from and the challenges of starting a business in your area.

Smaller than most banks, credit unions take the time to understand your business needs and goals, building long-term partnerships that often last for decades. And, with no external shareholders seeking to maximize profits, credit unions can focus on the needs of their members, and give more money back with fewer fees and better rates.

Affordable, flexible, and always there for you, credit unions help you build the financial foundations and flexibility you need to survive and thrive in a competitive business environment.

FIBRE FEDERAL: YOUR PARTNER IN SUCCESS

Fibre Federal has been helping small businesses in the Lower Columbia region for more than 80 years. We offer our members a choice of specialized banking products including:

• Business and Business Plus checking accounts
• Business Money Market Checking Accounts
• Business Money Market Savings Accounts

We also offer loans for commercial real estate and to purchase business equipment. And, all our business services include:

• Card and payment processing services
• Remote deposits

Most importantly, we’re always ready to listen to you about the specific challenges you face in running your business, and to provide the guidance and tailored financial solutions you need to succeed now and long into the future.

Click below to learn more about how Fibre Federal can help your business thrive.

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