Running a small business certainly needs a hard work and many risks. Business owners must have the ability to reduce risk, especially when delivering products or services to consumers or markets, at price points that meet consumer demand levels.
According to the Small Business Administration (SBA), as many as 20 percent of small businesses fail in the first year, 50 percent go bankrupt after five years, and only 33 percent reach 10 years or more.
To protect a business from failure, business owners need to understand what can cause these failures. In addition, business owners must also know how to manage an obstacle that may be completely unavoidable.
For those of you who are just starting a business or are running a business, here are 4 common reasons why small businesses fail as reported by Investopedia on Wednesday (31/03/21).
The main reason why small businesses fail is lack of funds or working capital. This includes operating costs, funding payroll, and other costs that are not aligned with the revenue generated.
Meanwhile, the second reason is because business owners miss the pricing of products and services. Perhaps to beat the competition, the business owner charges a lower price than similar offerings, but results in too low a price for a long period of time, thus not recouping the money.
For small companies, especially in the startup phase, they only get funding sources from venture capitalists, investors and conventional bank loans. Without the inflow of funds from large projects, small companies are forced to close their businesses.
So to overcome this problem, small businesses need to set a realistic budget for the company’s operations and be willing to provide capital from themselves. Then when they get funding, business owners should already have various sources that they can use for capital.
This reason is due to lack of business acumen, especially on the part of the management team or business owners. Although owners have the necessary skills, they often do not have strong managerial attributes and do not have the time to properly supervise other employees.
Savvy business owners can outsource activities they don’t do well or have very little time on to, to be successful. A strong management team is one of the first additions a small business needs to continue operating well into the future.
Ineffective Business Plan
Small businesses often overlook the importance of effective business planning. At a minimum the plan includes a clear description of the business, current and future employee and management needs, broader market opportunities and threats, capital requirements, marketing initiatives and competitor analysis.
Entrepreneurs must have a solid understanding of the industry and their competition, before starting a company. The company’s specific business model and infrastructure must be established long before the product or service is offered to customers and potential and realistic revenue streams must be projected well in advance.
Business owners often fail to prepare for the needs, both in capital, prospect reach and accurate conversion rate projections. Having realistic projections in terms of target audience reach and sales conversion rate is critical to the success of a marketing campaign.
Keep in mind that marketing is an important aspect of any early-stage business. It is important for companies to ensure that they have set realistic budgets for current and future needs.