6 Reasons Small Businesses Fail

Small Business
on November 12, 2012

Every aspiring entrepreneur and new business owner is well aware of the statistics. All are aware that the odds of business success are stacked against them. All are aware of the importance of saving money. It’s a reality of operating a small business in today’s economy; success is never guaranteed. However, what are some of the most common reasons small businesses fail? Why is it that even the best small enterprises seem destined to fall short? More importantly, how is it that profitable small businesses still close their doors, even when they’ve got a fantastic product with solid gross profit margins? Well, regardless of how much profit is generated on sales, a small business is sure to fail when it ignores the following six areas.

1. Financing. While it’s true that interest rates are extremely competitive, it’s also true that very few small businesses are able to capitalize on today’s low cost of capital. After all, despite the number of times the Federal Reserve has used quantitative easing as a means of freeing up capital markets, banks are still reluctant to advance working capital to small businesses. Unfortunately, the requirements for securing credit for small business owners are daunting to say the least. Financing isn’t as plentiful as it once was, and it’s often the small business owner that pays the price for a lack of working capital.

2. Cash Flow Management. A small business could have an extremely competitive product offering and yet still shut its doors due to a lack of capital. Granted, cash flow is a going concern for all businesses. However, it’s especially difficult for small business owners. Why? Again, a large part of it comes from the lack of conventional financing options in this economy, one where banks and credit unions base their lending criteria on a business’s financials and that business’s ability to meet increasing stringent criteria. Large enterprises have history and performance on their side; small businesses don’t have that history or as many credit sources to call upon in order to balance out their cash position.

3. Inventory Management. Saving money on inventory is essential to a better bottom line. Reducing inventory obsolescence, financing and damage is critical to reducing the costs of goods sold (COGS) on individual products. Lower COGS equates to higher profit. Unfortunately, small businesses must finance inventory longer when demand declines. Lower market demand means small businesses must hold product on their shelves longer in order to facilitate sales. Higher financing means less profit. Again, it goes back to the lack of viable financing for today’s small businesses, and how despite lower interest rates, small businesses are still seeing their costs of capital increase.

4. Ignoring Marketing. Every company, regardless of its size, has a market that it sells in. Understanding the small business’s market is essential to increasing sales, growing market share and retaining customers. A small business without a marketing plan is one that is destined to fail. Ultimately, that marketing plan should define how the small business will succeed in its market and with its customers.

5. Lack of a Strategic Plan. It’s not enough just to come up with a marketing plan. A small business must also have an all-encompassing plan, one that outlines the company’s short-term and long-term financing needs and operational requirements. In this case, planning is never static. It’s never a one-time event and it is never stationary. Instead, it evolves with the conditions. Small businesses must continually review their plan and make sure it’s in line with the company’s overall goals and objectives.

6. Ignoring Customers. Ignoring the need for a marketing plan is one thing, but ignoring the needs of customers is something else entirely. Unfortunately, it’s a mistake that is often made by small business owners, ones who are certain they know exactly what their customers want, even if they don’t know themselves. This type of intransigence is costly. It’s ultimately the reason why some businesses become market leaders, while others are merely followers.

Now, does this mean that small businesses simply have to avoid these aforementioned six areas and success is theirs? Unfortunately, it doesn’t. However, it does point to areas of concern, ones that small businesses must pay close attention to. It’s about understanding why businesses fail and ensuring that small businesses don’t make the same mistakes.

Found in: Small Business
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