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Top 3 Reasons Why Small Businesses Fail and How to Overcome Them

Thinking about starting a new small business this year? Well, the good news is that you’re not alone! According to the Small Business Association, over 627,000 new businesses will open up each year. However, the bad news is that the SBA estimates that only 51% of these businesses will last past their first five years. So what exactly are the top reasons that these businesses fail and how do you overcome them? Let’s take a look!

1. Lack of Demand for the Product or Service:

According to a 2019 study done by CB Insights, the top reason (42%) businesses fail is because of a lack of demand for their product or service. Most small business owners pursue their entrepreneurial dreams because it’s their passion or something they enjoy doing. However, before you decide to spend tens of thousands of dollars turning your favorite hobby into a real business, do some heavy research and make sure there is a consistent demand for the product or service in your designated area.

The key phrases here are heavy research and consistent demand. Opening a business is an investment, both an investment of your time and your money! So just like you would take the time to research and test drive a new car before buying it, make sure to take your time to research everything you can about starting a new business and know your total investment. Make sure to identify who your customers are, how often they’ll need your products or services, and how much they’re willing to spend on these products or services.

The other key phrase is consistent demand. Make sure that your product or service is either something that can be repeatedly purchased or has a high-profit margin. Selling a service instead? Look at recurring monthly revenue models to ensure you’ve got consistent money coming in month over month!

2. Cash Flow Problems

The next reason small businesses fail is due to problems surrounding cash flow. CB Insights estimates 29% of small businesses that failed either had insufficient revenue coming in, too many expenses going out, or a combination of both. It’s important to remember that most businesses are operating on slim profit margins when they first start, which means business owners need to be smart and extremely efficient with how they’re managing their business operations. Too many errors here and there can mean the end of your business.

Solution: Budget your monthly expenses and make sure to leave enough room for operating errors and unplanned expenses because you will have them. Don’t just look at your budget once and expect to make decisions from one estimate, do this monthly to ensure you’re staying on track of your income and expenses!

Not good with numbers or organization? Hire an accountant or bookkeeper to do your work for you! Need help finding one? We know a few!

3. Hiring the Wrong Team

Lastly, rounding out the Top 3 Reasons Why a Small Business Fails is Problems Hiring the Right Team. According to CB insights, 23% of small businesses failed because they hired the wrong team of employees.

Just like any situation in life: it’s all about having the right people by you. Teamwork makes the dream work. And if you’ve got the wrong, unqualified people on your team, chances are that your business will struggle due to a lack of skills and experience.

The solution to this problem is to identify what key in-house positions you’ll need for your small business: sales, marketing, HR, etc., and take time to find the right person for your team.

There are other key positions that you’ll need for your business such as a bookkeeper and lawyer, however, you can always outsource these tasks to local firms on an as-needed basis! By doing so, you won’t have extra people on your payroll that you don’t need and be more efficient with your team of experts!

Thinking about opening up a new business or need a business consultant with experience? Give us a call at (707) 474-9510 and see how we can help!


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