Published August 7, 2006

Causes of Small Business Failure and Business Failure Contributors

There are many reasons why a business might fail in its first one to two years. We are going to look at three of the most common reasons and help you to make sure that you put into place the right structures and functions to keep these from happening.

  1. Lack of Profit: It probably does not come as a surprise to you that one of the main causes of business failure is the lack of profit: not always the lack of income (although sometimes that is the problem) and not always because of high expenses (although sometimes that is the problem). New businesses drip money left and right, sometimes for new equipment but sometimes also because there aren't any policies in place to determine if an expense is necessary or not. And, if your new business is busy right to begin with, a lack of organization, coupled with not having a "regular system" in place results in a lot of wastage. Continually ask yourself these three questions:
    • Is this expense going to get me more customers?
    • Can I find a way to get the same result without the cost?
    • Is there a way I can get more customers?
  2. Lack of capital: The income/expense challenge probably did not surprise you, but it may come as a surprise to you to discover that the lack of capital is a major contributor to business failure. Why? Because growing businesses need money to continue growing, but new businesses lack the financial history to get funding. The result: A "baby" business remains a baby business, without enough infrastructure to meet demand; dissatisfied customers drift away and we can't increase production to lower expenses. How do you overcome this challenge? By being proactive: Set aside money at the very beginning into a short term investment and earmark it strictly for capital expenses. Consider alternative financing options (like finding private investors instead of going to the banks). Try using an intermediate step like outsourcing some of your non-core products so that you can focus your resources on developing your core products. If you do go to the bank for money, make sure you have a rock-solid business plan that shows them you have experience, initial success, and you know what you are doing.
  3. Lack of time: Entrepreneurs could probably use a hefty dollop of extra time even more frequently than they could use extra funding. Ask any entrepreneur and they'd tell you that they'd rather get an extra few hours each day to work than a loan from a bank. Unfortunately, we can borrow money much more easily than we borrow time. The result is that we rush around trying to serve a few customers rather than managing other people to serve many customers. If you are growing your business and you are faced with a time crunch, but not yet busy enough to hire someone else, consider these options: try outsourcing some of your non-essential work to a Business Process Outsourcing (BPO) provider. Contact a temp agency to hire someone to simply answer the phones and return calls. Determine what you do well and get other people to do everything else.