There are currently more than 32.5 million small businesses in the United States.   These account for 99.9 percent of all US businesses (SBA, 2021).  The Small Business Administration (SBA) defines a small business as a firm that has fewer than 500 employees. This means that many highly valued startups in the US fit within this definition of small businesses. 

Unfortunately, according to data from the U.S. Bureau of Labor Statistics, about 20% of U.S. small businesses fail wiithin the first year. By the end of their fifth year, roughly 50% have faltered. After 10 years, only around a third of businesses have survived.

To help give your start-up business the best chance of survival, it is important to be aware of the top reasons why small businesses fail and how to avoid becoming one of them. 

1. LACK OF DEMAND FOR THE PRODUCT OR SERVICE

Almost half — 42% — of startup businesses fail because people don’t actually need or want what they’re selling, according to research firm CB Insights. This means that assessing the potential market is essential to ensure success.

Figuring out if there’s a market for your product or service requires talking to potential customers to understand their problems and needs. It’s a mistake to assume you know what their pain points are or that your product will be attractive simply because it’s an advancement in your field.

2. CASH FLOW PROBLEMS

Managing money is a stumbling block for many new businesses — 29% of failed startups point to cash flow problems as a central issue. Insufficient cash flowing in and out of the business is a result of other problems, such as lack of product-market fit, failure to capitalize on opportunities or hesitation in seeking capital.

Many businesses operate on lean margins, which leaves little room for financial error. Success can depend on figuring out how to run efficiently in order to build up a cushion and acquire some security and flexibility.

“I put a tremendous emphasis on cash flow and having a solid financial platform,” said Tom Raymond, a SCORE  mentor in Detroit. “Most startups don’t even know what an Excel spreadsheet is.”

3. PROBLEMS ATTRACTING THE RIGHT TALENT

Employees are a company’s most important resource, so hiring the wrong ones or creating the wrong positions just about guarantees major problems. Almost a quarter — 23% — of failed businesses cite having the wrong team as a main reason their business folded.

In some cases, founders have a desire to do everything themselves, despite lacking the capabilities or skills for certain tasks. In other cases, they want to hire their friends or relatives over more experienced or more suitable people. Some businesses fail because leadership positions are misaligned, the staff lacks diversity or the board is mismanaged.

4. NOT RESEARCHING THE COMPETITION

It’s essential to investigate who else is already trying to fill your target audience’s needs. Neglecting to look critically at the competition is cited as a reason for failure by 19% of startups that fold.

A sector with other entrants indicates that there’s a true market need that businesses are competing to meet. But a crowded field or a sector with extremely well-funded and experienced competitors will be more difficult to enter successfully than a more sparsely-populated one. Either way, businesses with a unique value proposition will be most successful in edging out others for customers’ attention.

Contact The Bookkeeping, Accounting & Tax Prep Company for support and answers to all of your small business challenges.  We, along with our vast network of business professionals, will not only help you define any issues you may have, we will develop a plan with controls to solve the issue and ensure it does not return.

Dana Laflash, ABA

tbatpc.com

dana@tbatpc.com

(727) 210-3317