Why Small Businesses Fail & How to Succeed Instead

mall business owners come in all shapes and sizes these days. You can sell tacos out of a truck, make your own jewelry and sell it on Etsy, run a hair salon on the go, or create an app that teaches kids magic tricks. In all of these cases, you count as an entrepreneur who has the opportunity to follow your passion and make a living out of it.   However, your small business can collapse if you don’t have the right amount of experience, cash, or employees by your side. Research shows that about 20% of new small businesses fail within a year, while 50% of these fail within five years.  

Today, we are sharing five common reasons why small businesses go under, and how you can avoid being just another statistic and succeed instead.

Reasons why Small Businesses Fail - and Solutions

Problem: Not Enough Money for Your Small Business

Before you start your business, you gotta make sure you have enough cash to run it effectively. Roughly 82% of businesses fail because of cash flow problems. When you have to take an expensive loan with high interest rates just to pay your workers and cover costs, it might already be too late.  

Solution: Plan for 1-2 Years of Costs

You don’t want to have cash flow problems, so what should you do? The general rule of thumb is to plan ahead. Have enough capital to cover one to two years of expenses. These include worker salaries, supplies, and maintenance costs. It can also help to get a financial advisor on board to help you manage your proverbial dough.

Problem: Hiring the Wrong People

About 46% of small businesses fail because of “incompetence.” This statistic shows just how damaging it can be to hire the wrong people. Someone who lacks the passion, or the dedication to help you bring your business plan to fruition can slow your progress down. Sometimes all it takes is one bad worker to cause your business to implode.  

Solution: Find People Who Get It

Even if you’re just starting out, it’s important to create an effective vetting process. Ask each candidate about their experience in the field (obviously), but don’t be afraid to dig deeper. Having motivation, people skills, and chemistry with other employees are all invaluable skills.   Plus, if a candidate’s goals are in line with that of your business, they may be a better hire than a more experienced person who doesn’t share the same ambition and passion.

Problem: Trying to Build Rome in a Day

Listen, we get it. Starting a new business can be the thrill of a lifetime. It’s an opportunity to show everyone what you’re made of with something that could positively impact the lives of others. However, many small businesses fail because they scale too quickly. Just look at tech startups--74% of them fail because they scaled too fast. And this is an issue that can happen in any industry.

Solution: Remember the Tortoise and the Hare?

You might have to move quickly at first. Every business needs a certain amount of planning, capital, structure, and maybe other employees to get off the ground. However, once you start moving, slow and steady often wins the race. This is what the fable of the tortoise and the hare taught us as kids, and it’s as pertinent now as it was then.

Problem: Not Enough Demand

Some small business owners fall so in love with their own product that they forget to ask if it’s something people want. A study found that 42% of small businesses fail because they failed to fill a gap in the market. In other words, they forget to listen to their audience and make adjustments accordingly.

Solution: Don’t Be Afraid to Change It Up

Just because your initial idea isn’t a homerun doesn’t mean it’s a bad one. Maybe some elements of your product are working, while others are not hitting the mark. The solution is to listen to your audience, phase out what isn’t working, focus on what is working, and revamp your business (like the story of the sticky note)!  

You’re going to make mistakes along the way, and how you respond to those mistakes will determine the success of your small business. -Michael Rangel, Novo CEO and Co-Founder

The Takeaway

Most small businesses fail because the owner does not do their homework. From not getting the right amount of cash, to hiring the wrong people, or creating the wrong product, there are a lot of fatal decisions companies can make. However, a combination of passion, preparation, and consistency can help your business become the success story it’s destined to be.