Why Some Businesses Fail So Quickly (and How to Avoid These Pitfalls)

By James Grieco

This is a sponsored post by MightyCall.com, a virtual phone system provider that helps small businesses organize and manage their customer communications.

People get wrapped up in the misrepresented hopelessness of starting a small business. Random apocalyptic figures are thrown around (50% close in the first year! 90% in the first five years!) but in reality, the chances of any individual small business not just surviving, but making a profit are quite reasonable: about 80% of businesses with employees survive their first year, and around 50% make it through year five. Specific industries have different survival rates, but the broader numbers hold true.

Per SmallBizTrends, 40% of small businesses turn a profit and another 30% break even, offering even more hope to those dreaming of making the jump into entrepreneurship. Even better? We have over 25 years of data that suggests these numbers are steady, and thus, largely irrespective of larger economic trends and patterns. 

Still, even 20% of businesses bowing out within 12 months represents thousands and thousands of businesses and jobs. While it may actually be better to fail quickly and reduce overall losses in the long-run, the reasons for businesses going under—whether in five months or five years—remain the same.

Here we’ll analyze a few of the prominent reasons why small businesses fail and how you can make sure your company doesn’t get dragged under by them.

1. You Have Cashflow Problems

Cashflow problems cover most parts of a company’s finances, from pricing and cost issues to lack of investments or simply running out of money.

Kabbage, a financial services and data platform, interviewed 600 “thriving U.S. small business owners” and discovered that 33% of them started with less than $5,000 and 58% started with under $25,000. It’s important to note survivor’s bias in these figures as well—plenty of entrepreneurs start with thousands of dollars but still end up closing their doors. 

How could a small business burn through anywhere near $25,000 in a year? Well, that’s the problem, as failed business often don’t know because they didn’t adequately monitor their cash. Running out of money should never come as a surprise to a business, but rather a trend you see coming and can react to months in advance.

How to beat it: While banks traditionally were a primary source of small business loans (and still offer plenty of different business loans) many entrepreneurs in recent years have started their business with their own personal money or borrowings from friends and family, bypassing interest rates and paperwork. 

However, banks typically require thorough business plans and models before giving individuals loans, which forces entrepreneurs into creating a roadmap for their company. As the old adage goes, “Failing to prepare is preparing to fail.” It may seem like an inconvenience, but banks do this for a reason—they want to stand a good bet to get their money back, otherwise they’d just as well throw cash into the ocean.

Even if you aren’t going to borrow from a bank, take a page out of that playbook and make a thorough business plan covering at least the beginning two-year trajectory of your company to show anyone you ask for money—even if it’s your mother. 

In your business plan, it is important to do two things: 1) Do not expect your company to make a profit off its products/services for years, as this is actually the norm even for companies that do eventually “make it.” 2) Overestimate costs across the board; you’d much rather be surprised by savings than by unexpected costs.

2. You Didn’t Do Your Homework (or Enough of It)

The most common response to the CB Insights startup failure poll was “No market need.” That is also the most inexcusable answer listed. Another 19% said they were “outcompeted,” almost equally as egregious.

You don’t need to be a veteran of an industry to start a business, but you should know what’s going on there like the back of your hand. No matter how great an idea you might have, the minute it seems fully-formed, you are still light years away from being ready to launch that business. 

How to beat it: You need to treat every aspect of the industry your business will enter as its own separate college course—and not the introductory 101 courses either.

Firstly, make sure you know who the target audience is and then get out there and talk to as many of those people as you can about every detail you can, big and small. Having experience in the industry will help you focus your efforts on how and where to reach customers, although again, that experience isn’t strictly necessary to get a feel for the market.

Most hobbies, industries and communities have some kind of message boards online, and it’s always useful speaking face-to-face with customers. Opening a restaurant? Go to local markets and restaurants and strike up conversations with people. Want to get into healthcare? Go find doctors and medical professionals and go speak to people living in nursing homes.

Step out of your comfort zone to make sure you get a wide range of answers. Small sample sizes aren’t going to help much. And frankly speaking, if you’re having trouble finding customers to talk to, that’s a bad sign about your company’s future prospects.

Secondly, get to know your competitors inside and out. What makes them unique? What is their brand? What are their strengths and weaknesses? How will they react to another competitor appearing?

I mentioned above that you need to write out a thorough business plan before getting started. Well, you should be able to sit down and write out your competitors’ business plans too. If you research the market and can’t figure out what an entrenched company is doing, then you haven’t learned enough about the market to launch a successful business.

You absolutely mustn’t copy or try to imitate what your competition is doing either, but fully understanding existing approaches will let you properly define a space within the market that will make your company unique and valuable to the customers therein.  

3. You’re Not Organized

Whether this is lacking a proper business model, not gathering the right team, or not executing a pivot or growth correctly, your ducks need to be in a row if day-to-day operations are going to go smoothly.

Organization is about having the skills and ability to lead your company and make it a place where every employee knows their role and is provided with an environment that maximizes their chances of flourishing in said role. 

How to beat it: Don’t be afraid to get or look for help.

Running a business takes a tremendous amount of time and energy; entrepreneurs often work considerably more than normal workers, and some of the most successful entrepreneurs would even urge you to work 12+ hours a day

You need to centralize and simplify facets of your business to be able to stay on top of things. Luckily, in 2019, there are thousands of different programs to help you do this.

From the multitude of CRM (customer relationship management) software to accounting software to cloud services that help you manage customer communications, spending a little extra per month to automate grunt work will mean more time for you and your employees to actual use that information to better your business.

It’s entirely possible and affordable for a small business to be running multiple “quality of life” services for less than $150 a month, and in some cases, even under $100. You should incorporate these into your cost estimates from the second you open for business, as there is no such thing as retrospective organization.

Your company is either organized from the beginning or it’s in trouble. If it costs a bit to ensure operations run without a hitch, don’t cheap out. After all, you get what you put in—whether that’s time or money. 

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James Grieco on Twitter
James Grieco
James Grieco is a content marketing manager at MightyCall. When he isn't trying to explain VoIP and its benefits to people, he watches sports or binges detective novels. You can follow him for random and irregular thoughts: @LackingAFilter.

2 comments

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  1. James, I absolutely agree! Mind your money, always, especially in the beginning. Do your homework, plan ahead, research your niche. Organize, absolutely! One of the best assets for organizing is using the calendar part of your email app, it’s free, and it works for you if you use it. Thank you, this is such great information.

  2. Well stated. I agree with your thoughts on business failures. Item #3 was the one that stuck out the most for me. I’m focused more recently on getting better organized for hiring employees. Setting reminders seem to help quite a bit for me.

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