3 Reasons Small Businesses Fail (How to Avoid Them) (2024)

3 Reasons Small Businesses Fail (How to Avoid Them) (1)

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Small businesses fail at an alarmingly high rate. Here’s how to mitigate the risks that all new ventures face.


Emily Heaslip , Contributor

3 Reasons Small Businesses Fail (How to Avoid Them) (2)

Starting a small business takes patience, perseverance, and a lot of hard work. It’s not easy to launch a new venture: Data from the U.S. Bureau of Labor Statistics shows that nearly half of all startups fail within the first five years.

There are some common reasons why small businesses fail. Understanding the obstacles that other business owners have faced can help you prepare to navigate these specific challenges. Below are the top three reasons why small businesses go under and tips on how you can avoid the same fate.

Challenge No. 1: Cash flow problems

According to SCORE, 82% of small businesses fail due to cash flow problems. Cash flow is a blanket term that has many underlying roots. Cash flow is simply a metric that indicates how money is coming in and being spent at your business. Cash flow issues can result from a lack of funding, poor budgeting, or inventory management issues, among other things.

There are a few ways to mitigate this risk, although it’s worth reiterating that negative cash flow is often an indicator of a different issue. First, avoid big expenses in your first year of business.

“As your business launches and grows, there will be a push and pull between funding and supporting that growth, and being conservative with your spending,” wrote SCORE. “When in doubt, stay conservative. The ‘lean and mean’ startup headset — and the concept of a minimum viable budget — is your friend.”

A lean operating budget is a good starting point, but it isn’t the only way to manage your cash flow. Spend time tracking your inventory, building cash reserves, and making sure your accounting is running smoothly. Many experts recommend working with a certified public accountant during the first few years after your business has launched to ensure your accounts receivable/accounts payable systems are working well and that you have enough set aside for taxes.

[Read more: Best Entrepreneurial Advice From the Founders Behind America's Hottest Startups]

The other side of cash flow is revenue, or financing, for new businesses. Many small business owners struggle to find loans, grants, or investors to fund their ventures. Look for unique funding opportunities for small businesses, such as government loans, business diversity grants, or industry-specific grants.

Just over 40% of small businesses fail because there’s an insufficient need for their product or service.

Challenge No. 2: There’s no demand for your product or service

Just over 40% of small businesses fail because there’s an insufficient need for their product or service. When there’s no demand for what you’re selling, the best marketing campaign in the world won’t turn around your business results.

Avoid this risk by doing the right market research before launch. This exercise should form a key part of your business plan. The National Federation of Independent Business reports that companies with a business plan have the best chance of success — particularly if they identify their potential markets, define their ideal customer, and analyze their competition.

Many good, affordable resources can help you estimate the demand for your product or service. Try Google Trends, a free tool that can show you how often people are searching for keywords related to your product or service. Surveys and focus groups can also help you get feedback on a minimum viable product during your development process.

[Read more: 5 Qualities Successful Small Businesses Have in Common]

Challenge No. 3: Poor management

As the creator and founder of the business, it can be tempting to hold tight to the reins as your venture gets off the ground. Unfortunately, attempting to do everything yourself is neither sustainable nor helpful for the longevity of your business.

“While the owner may have the skills necessary to create and sell a viable product or service, they often lack the attributes of a strong manager and don't have the time to successfully oversee other employees,” wrote Investopedia. “Without a dedicated management team, a business owner has greater potential to mismanage certain aspects of the business, whether it be finances, hiring, or marketing.”

Your budget may not allow you to hire a full senior leadership team, but look for ways to delegate key roles effectively. That might involve bringing in a fractional CFO, hiring a mid-level manager, bringing on a virtual assistant, or outsourcing key tasks to a partner.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

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3 Reasons Small Businesses Fail (How to Avoid Them) (2024)


3 Reasons Small Businesses Fail (How to Avoid Them)? ›

The most common reasons small businesses fail include a lack of capital or funding, retaining an inadequate management team, a faulty infrastructure or business model, and unsuccessful marketing initiatives.

What are the 7 reasons why small business fail? ›

7 Reasons Why Small Businesses Fail
  • Lack of Proper Planning. ...
  • Inadequate Financial Management. ...
  • Insufficient Market Demand. ...
  • Weak Marketing and Branding Strategies. ...
  • Ineffective Leadership and Management. ...
  • Competitive Landscape and Industry Changes. ...
  • Lack of Persistence and Resilience.
Oct 5, 2023

What are three primary reasons that small businesses fail select all that apply? ›

Sherrie Morici Buckmeier
  • The 3 Most Common Reasons Small Businesses Fail. ...
  • Recruiting an Ineffective Team. ...
  • Implementing a Faulty Infrastructure/Business Model (or not having one at all) ...
  • Unsuccessful Marketing Initiatives.
Jul 10, 2023

What are three primary reasons that small businesses fail quizlet? ›

The three main causes of small-business failure are management shortcomings, inadequate financing, and difficulty complying with government regulations.

Why 90% of small businesses fail? ›

According to business owners, reasons for failure include money running out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an expert in the industry. Ways to avoid failing include setting goals, accurate research, loving the work, and not quitting.

What is the #1 reason small businesses fail? ›

“If you lack the cash or assets to start on your own, like most businesses, you will need to borrow,” it says. Poor cash flow. According to SCORE, 82% of all small businesses fail due to cash flow problems.

What are 4 causes of business failure? ›

The most common reasons small businesses fail include a lack of capital or funding, retaining an inadequate management team, a faulty infrastructure or business model, and unsuccessful marketing initiatives.

What are the three main factors that cause entrepreneurial business failures? ›

5 all-too-common reasons why entrepreneurs fail
  • FAILURE TO ASSESS THE MARKET. This is the single biggest reason businesses fail: 42% go under because there is no market for their product. ...
Jan 11, 2022

How many small businesses fail within 3 years? ›

Business failure rate across the U.S.
Time framePercentage of businesses that fail
Within 1 year23.2%
After 2 years32.8%
After 3 years36.2%
After 4 years43.2%
6 more rows
Apr 8, 2024

How many small businesses fail in the first 3 years? ›

Based on businesses that opened in 2002, 20.8% of businesses fail within the first year, according to the Bureau of Labor Statistics. 40% of businesses fail within the first three years, 49.9% within five years, 65.8% within 10 years, 73.3% within 15 years, and nearly 80% within 20 years.

What of small businesses fail? ›

Data from the BLS shows that approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new businesses make it to 15 years or more.

Why do small businesses fail in the first few years? ›

A primary reason why small businesses fail is a lack of funding or working capital, according to Mr Mooney. Running out of money is a small business's biggest risk. Owners often know what funds are needed from day to day but are unclear as to how much revenue is being generated, leading to poor cash flow management.

What is the most important reason many small businesses fail quizlet? ›

What is the most important reason many small businesses fail? entrepreneurs sometimes don't start with good financial planning.

Why do 70% of businesses fail? ›

This lack of adaptability, innovation and marketing will almost always result in failure. Let's face it, business owners can easily become complaisant and are often married to their original idea that they founded their business on. People don't like change, especially seasoned entrepreneurs.

Why do 95% of businesses fail? ›

The causes of failure are numerous, from a faulty business model and poor product-market fit to running out of cash or a lack of passion and perseverance. However, one of the most critical and overlooked reasons startups fail comes down to poor hiring and talent acquisition practices.

Do most start ups fail? ›

What Percentage of Startups Fail? According to the latest data, up to 90% of startups fail. Across almost all industries, the average failure rate for year one is 10% However, in years two through five, a staggering 70% of new businesses will fail.

What is the most common business to fail? ›

What industry has the highest failure rate? Transportation, construction, and warehousing have the worst failure rates with 30%-40% of these businesses surviving five years, while approximately 50% of all businesses make it to their fifth year.

Why do small businesses succeed? ›

A key component in why a small business will succeed is its leadership and their vision. A well-defined vision is a skill or gift that every company leader needs in order to cross the finish line. It will be the major force behind an entrepreneur's success and will serve as a compass in tough times.

How do you recover a failing business? ›

How do you revive a struggling business?
  1. Adjust your mindset.
  2. Set goals.
  3. Learn why customers are leaving.
  4. Understand your target audience.
  5. Perform a SWOT analysis.
  6. Take a hard look at your finances.
  7. Get funding if you need it.
  8. Pivot and change direction.
Mar 21, 2023

Why do some small business succeed and some fail? ›

In summary, there are many factors that contribute to the success or failure of a business, including vision, resilience, leadership, financial management, innovation, customer focus, marketing and branding, team building, operational efficiency, and persistence.

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