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7 Reasons Why Small Businesses Fail

October 6, 2023

7 Reasons Why Small Businesses Fail

Ariel Gottfeld

Ariel Gottfeld

Business failures are more common than people think. An average of 1-in-5 businesses fail within the first year, and this figure rises greatly each year for the first five years.

Why do these companies fail?

There are a lot of challenges that businesses face that often go overlooked during their founding. Learning these issues early on and doing everything to protect against them is a good first step in remaining in operation for years to come.

The Challenge of Small Business Failures

If you know why small businesses fail, you can work to stop potential failure. Every entrepreneur should know the challenges that they face or put management in place that does.

The following reasons are the most common causes of startup failure.

1. Lack of Proper Planning

Comprehensive business plans are more important than owners assume. These plans are often used to obtain funding, yet they allow you to have the in-depth planning in place to succeed in the industry.


Business plans lower the risk of business failures by allowing you to plan for the following:

  • Market analysis
  • Market strategy
  • Marketing plans
  • Sales plans
  • Description of products and services
  • Operating plans
  • Financial projections
  • Much more

Projections are one of the components that enlighten owners about the potential of their business and allow them to develop a roadmap of success for the business. If you don’t have one already, begin creating your business plan to reveal insights that you may have otherwise overlooked.

2. Inadequate Financial Management

Failing companies almost always have one thing in common: poor financial management. Small businesses are on a limited budget and do not have the massive amount of funding that Fortune 500 companies can offer to their subsidies.

Common issues in financial management include:

  1. Poor budgeting, leading to overspending
  2. Inadequate cash flow management, leading to struggling cash reserves
  3. High amounts of debt

Cash flow remains the single largest factor in business failure. SCORE reports that 82% of companies fail due to cash flow problems. If you lack adequate cash flow, you’ll:

  • Accumulate higher debt
  • Struggle to pay debts

If you cut back on expenses or find other forms of funding at low interest rates, you’ll have an easier time maintaining healthy cash reserves.

Otherwise, if cash flow is low, you won’t have the liquidity to pay for supplies, make payroll and satisfy debts. The end result? A failed business that has insurmountable debt.

3. Insufficient Market Demand

You love your product or service idea, but does everyone else? Is there demand in the market for what you want to offer? Some of the most cutting-edge solutions never made it past the prototype and initial supply phase because the market just wasn’t ready to embrace them.

You can avoid this fate by:

  • Assessing customer needs on a local and much wider scale
  • Analyze the competition and your potential to take market share
  • Validate the business idea

Unfortunately, it’s not enough to assume your 1-in-a-million idea is going to be successful. In-depth market research and surveys must be performed to ensure that your product is one with enough demand to justify the investment.

4. Weak Marketing and Branding Strategies

Even with high demand and interest in a market, you need to focus on marketing and branding if you don’t want to experience small business failure. The concept of “build it and they will come” is one that only happens in movies.

You need to:

  • Create a clear value proposition
  • Focus on consistent messaging and branding
  • Promote your business on the right marketing channels

Targeted marketing strategies with a high return on investment are ideal, and a lot of resources must go into the process to reach your target audience.

If a marketing strategy doesn’t work adequately and meet your KPIs, you need to know when to abandon it.

5. Ineffective Leadership and Management

Leadership and management are crucial skills to have as an entrepreneur. Steve Jobs was an amazing leader with the pizazz to convey ideas to the world that were exciting and innovative.

However, he was just one part of the team.

Strong leaders like Jobs knew how to:

  • Make impactful decisions to grow the business
  • Change with the market conditions
  • Delegate

A few of the biggest mistakes that effective leaders make are that they micromanage, fail to delegate tasks and have poor team communication.

6. Competitive Landscape and Industry Changes

One of the big reasons why small businesses fail is that they don’t adapt to industry changes to stay ahead of the competition.

Some small business owners also make the mistake of getting into markets that are highly competitive and have more established, larger competitors. Entering and succeeding in saturated markets can be very challenging, particularly if you don’t have a strong unique selling point.

Entering into an industry that’s constantly evolving can also be challenging and lead to failure if you don’t adapt to it. It’s crucial to ensure your business is agile and able to adapt to changes and the landscape shifts.

7. Lack of Persistence and Resilience

Just like in life, things rarely go smoothly or as planned in business. Every business owner faces setbacks and challenges.

But one of the most overlooked reasons small businesses fail is that owners don’t have perseverance or resilience.

It’s okay to have setbacks. In fact, these are opportunities for learning and growth. Don’t let them deter you and keep you from pushing forward to your goal.

Steve Jobs faced failure, but he didn’t let that stop him from achieving his goals. He pushed for the development of the Apple Lisa and Apple I, two products that failed miserably. Apple was unable to recoup the millions of dollars they invested in these products, so Jobs was ousted from the company he helped found.

In 1997, he found his way back to Apple, took the helm and helped drive the company to what it is today: a household name.

If Steve Jobs faced failure, then you undoubtedly will at some point. Learn from these mistakes, adapt your strategy and keep a positive mindset.


Businesses can fail for a number of reasons, from lack of planning to poor financial management, lack of market demand, weak branding, ineffective leadership, shifting markets and lack of resilience.

Businesses must engage in proper planning and brand building to achieve their objectives and attract new customers. Addressing the challenges above can help businesses improve their chances of success. To avoid these common pitfalls, seek out the help and support of professionals and use the tools at your disposal to keep your plans and finances in check.

Tools like Cash Flow Frog can help you monitor your cash flow and create forecasts that you can use to make data-backed decisions for your business.

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