Why Small Businesses Fail Often & What To Do About It
One of the most beautiful properties of capitalism is the intrinsic equality it provides for everyone who wants to participate. Anyone, regardless of race, gender, or social status is allowed to begin transacting business for their own benefit whenever they want (barring a few government permits, licenses, etc.) Of course, capitalism isn’t a perfect system.
Since everyone can start a business, quite a few people do! There are over 30 million small businesses in the United States alone, with that number increasing every year.
As a result of this flourishing business environment, competition between small businesses is quite high. And while this competition keeps innovation, technological progress, and overall wealth and quality of life on the rise across the board, it does mean that many business ventures must fail.
Only about 20% of businesses make it to a stable, growing status in the business arena. In order to survive, you have to be the best. Let’s walk through some of the main reasons small businesses fail, and what you can do about it.
The Product Doesn’t Sell
Profit is the lifeblood of a business. Profit is the difference between revenue and expenses and maximizing it should be your main goal when taking on any value-creating endeavor. The two parts of profit, revenue and expenses, can be broken down and analyzed individually.
Revenue is the raw dollar value earned purely on sales of your product or service. If you sell 100 pizzas at $10 each, your revenue is $1,000. Expenses are, at the most basic level, the costs of creating your goods to sell. For pizza, it’s the ovens, dough, sauce, cheese, and the wages of the people who make the pizza.
When you boil it down, the ONLY reason businesses fail is a level of profit that is not sufficient. There are, however, infinite reasons as to why this can happen.
One of the most common is that your new products or services simply don’t sell well enough.
Sometimes, when a product or service is developed, it’s true utility becomes clouded in pride, ego, or logistics. A product may be designed as a solution for a problem that doesn’t exist. In this case, when the product comes to market, the consumers simply don’t react. Other times, the product does offer a solution for a real problem, but it’s a solution that no one wants. Finally, a product may flop due to a marketing issue: You might have the best product or service in the world, but no one will buy it if they don’t know about it.
While it’s impossible to perfectly predict how the market will react to a new product, you can reduce the chances of a product flop by spending a little extra time or money on focus groups, market research, and brainstorming.
Capital Flow Issues
About half of all entrepreneurs with failed ventures state that a lack of proper capital flow is one of the main reasons for failure. Cash flow is crucial for the day-to-day operations of any given business.
Cash is needed on a daily, weekly, monthly, and yearly basis in order to cover ongoing expenses, interest payments, or due loans. Failure to cover these expenses in a timely manner will lead to payroll issues, defaulted loans, and ultimately closure of the business.
As a business owner, the best way to prevent cash flow issues is by understanding exactly what you need each day, week, month, and year in order to keep the business afloat. We’ll touch more on this later.
Bad Management
Most issues in business can be attributed to the level of competence within management. Management is the brain behind a business: The blood can’t flow properly unless the brain tells it to.
Within management, there are a number of concepts that can poorly affect the performance of your business. First, there is the overall competence of the members of management. Education, training, experience, and wisdom all factor into this, so it’s important that you pick the right people for your team. While it can be fun to work with friends, you need to ensure that they are also qualified to handle the responsibilities you give them.
Conflict within management is also considered one of the most common issues for new businesses. If managers and executives can’t get along, the business will suffer. It’s important to ensure that your team is properly trained in conflict resolution so that your operations remain unaffected.
Another area of management that sometimes gets neglected is communication. Transparent information, and the rate at which it travels, is directly related to how effectively a business can operate and adapt to market changes.
The Most Effective Way to Prevent Failure
Monitoring your business is the best way to prevent surprises in your finances. You need to be able to quickly check sales and expenses with perfect accuracy. To do this, invest proper time and care into your bookkeeping.
Accurate bookkeeping allows for more effective communication. With accounting software like QuickBooks, businesses can easily share financial information between managers, executives, and employees with ease.
Booktied specializes in everything bookkeeping-related. From QuickBooks training and instruction to full-service outsourced bookkeeping, Booktied gives you all of the resources you need to properly monitor and communicate the financial status of your business.
For any questions you might have about our services or about bookkeeping in general, drop us a line, and we’ll be happy to help!