6 Reasons Why Businesses Fail and How to Avoid Them

New businesses are springing up all the time. Then why is it that as many as 8 out of 10 new businesses fail before they are two years old? In fact, almost one-fifth of start-ups fail in the first year, according to statistics published by the US Small Business Administration. Four out of five businesses go on to fail within the first five years.

Of course, no small businessman wants to think about failure shortly after setting up a limited company. But knowing what the potential pitfalls are can prove to be invaluable. In other words, learn from the mistakes made by other small businesses and avoid becoming part of the statistics.

Here are 6 common mistakes that lead to business failure to watch out for.

  1. Starting a business for the wrong reasons

Different things motivate different people to start their own business. Some want to be self-employed and others think it will give them more time to spend with their family.

Whatever the reasons for a start-up are, they are not necessarily all good. Here are only some of the wrong reasons to start a business:

  • You’re only in it for the money
  • You hate your current job so much you’ll do anything to quit
  • You hate your boss just as much as you hate your job
  • You think working for yourself will relate to less work
  • A friend or family member convinced you to join them as a partner
  • You think being an entrepreneur is easier than working a 9-to-5 job

On the contrary, here are some good reasons for your own business:

  • You’ve already validated your business idea
  • You believe you can deliver something unique and valuable
  • You already have some relevant experience to back you up
  • You have the necessary resources to make a success of a start-up


  1. Bad management practices

Entrepreneurs aren’t automatically good managers. In fact, many of them are terrible bosses. The truth is that being a good boss is good for business. Some more reasons to work on your management skills are:

  • Time management – It’s easy to get carried away by ideas, and not evaluate and prioritise tasks according to relevance and importance.
  • Business planning – A start-up is doomed to fail without a proper business plan. This includes short-term as well as multi-year business plans to help you grow and develop.
  • Retaining top employees – A good manager retains top employees, which relates to less time spent on management, training, and recruitment.
  • Fostering good relationships – By leading with a positive mindset, rewarding good work, and giving people the freedom to innovate and progress you create a productive environment.
  • Sales and customer management – Keeping your hard-earned customers is no easy feat in today’s competitive marketplace. Stay up to date about what drives sales and how to generate new customers.
  • Financial management – Don’t neglect your bookkeeping. Rather employ someone to take care of your financial statements and tax returns while keeping a close personal eye.


  1. Not having enough start-up capital

A lack of capital is a common reason why small business fail. No business can survive with working capital or operating funds. This is the amount of liquid assets needed to run and grow your business.

As a general rule of thumb, you should have enough start-up capital to cover your business expenses until it generates enough income to sustain itself.

The need for working capital highlights the importance of proper planning before starting a business.  You must have an estimate of the costs of starting and staying in business. Plan for enough start-up capital for at least a year, or even longer until you make enough from sales to cover your running costs.

One option to secure start-up capital is a working capital loan. If this isn’t enough, here are some other ideas to make ends meet:

  • Start smaller with what you have before moving on to bigger and better things.
  • Find other ways to make money to invest in your start-up, even if it’s not directly related to your business. This can include taking on a second job or selling stuff on the internet.
  • Study your expenses and cut where you can.
  • Find out what business grants are available to support entrepreneurs. Most importantly, apply! You’ll never know if you’re going to get it if you don’t.
  • Seek out private investors who are willing to back enthusiastic and goal-orientated entrepreneurs with good business plans.


  1. Setting up in the wrong location

Starting up in the wrong location may prove to be a fatal error. A bad business location equals bad or non-existent business traffic. If your core targeted customers can’t find you, you may as well close your doors before you even started.

Business premises which are located where customers can easily drop by purposefully or by chance will outperform those whose services or products are hard to access. If you don’t have an online business, these are the questions to ask when deciding on the location of your physical business premises:

  • Who are your customers and where do they live and work?
  • How accessible is the location? Is there parking, what is the traffic situation outside?
  • How close or far are any possible competitors located?
  • In what condition is the premises? Would you have to invest more money to make it attractive or safe?
  • Are there any incentive programmes for business start-ups in the area?


  1. No online or social media presence

Every business in this day and age must have a website. Even if you don’t sell anything online, a professional looking website is instrumental in introducing your business to potential customers.

A business website should include the following:

  • A Home Page with a short but accurate and effective description of what your business is about, with links to a Services and/or Products Page.
  • An About Us Page, detailing who you are.
  • A prominent display of your physical address and contact details.
  • Links to your social media accounts.
  • Testimonies from satisfied customers.

It’s not good enough to just have a Facebook, Twitter or Instagram account. You must be active on these, posting regularly and engaging with your followers. Any messages should be answered within a couple of hours.

If you sell the kind of service or product that can also be sold online, an online shop is an added benefit.

  1. Ignoring products or service selling points

As an entrepreneur, you should know the selling points of your services or products. Moreover, you should be able to successfully communicate these to your employees and customers. Failing to do so, will result in dismal sales figures.

Find out what your products’ sales point is and how it relates to solving your customer’s problem. This doesn’t mean bombarding the customer with boring product details. Instead, he or she wants to know how the product or service is going to make his life easier, brighter, or better.  And for that, he will be willing to part with some money.

What it boils down to, is effective communication. Even if you know your selling point, but are unable to communicate it well, your message is lost. The following 3 C’s will help you overcome this problem.

  • Be clear – Do your customers have a clear overview of your business and what it offers them?
  • Be concise – Are you to the point when communicating your selling point to the customer?
  • Be compelling – Is your message persuasive enough to convince the customer to invest in your product or service?

By knowing what the possible reasons are why businesses fail, you can ensure that yours doesn’t follow the same path into oblivion like so many others.

Be aware of the cracks before you disappear into the abyss of failed start-ups. The foundation on which your business is built will determine its survival.

Remember, you are the only secret to your success. Failure was never an option for some of today’s most successful entrepreneurs. And even if they did make some of the above-mentioned mistakes, they learned from them and used that knowledge to come out stronger on the other side.

Therefore, while believing you can do it, also don’t fear failure. No matter how much you try to minimize your risk, there is always a chance of things going wrong. If this happens, don’t be shy to reach out to mentors who’ve been in the same position before.

Lastly, be patient! Ideas are fast to come by but executing them takes time. Hang in there.


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