Why do small businesses fail? The million dollar question. Starting a business is not easy, and there are literally dozens of statistics out there about the survival rate of small businesses.
Here are a few popular ones:
- Only about 20 percent of new businesses survive past their first year of operation
- Only 33 percent of startups make it to their tenth anniversary
- The U.S Census data shows that new business creation is nearly at a 40-year low.
On a side note, we can proudly say that ShopKeep is included in that 33 percent!
Whether you’re a seasoned small business owner or an entrepreneur just starting out, these statistics can be a little scary. What you probably don’t realize is the sample of ‘small businesses’ included in these studies. Fit Small Business does an excellent job of debunking some of these numbers and defining the types of small businesses taken into consideration.
The point is that while there may be some truth to these numbers, you shouldn’t let it kill your entrepreneurial spirit. Instead, try to understand the common reasons for small business failure. As the old saying goes success (and in this case, failure) leaves breadcrumbs. If you have an understanding of why other small businesses fail, you can avoid following in their footsteps.
Here are 9 reasons why businesses fail.
1. There’s No Business Plan or Unique Value
This first reason is especially true for new business owners. What you think sounds like a good business plan on paper, may not fare so well in reality. This doesn’t mean you should ignore your passions. Instead, it means you need to do a little research and planning.
Some things to consider include: Who are your customers? How will they buy your products or services — in-store, online, or both? What’s your marketing plan? How will customers find out about your business?
Answering these kinds of questions will help you ensure your products, services, and business idea are something that people will buy into. And with social media platforms at your fingertips, it makes the market research process that much easier.
For argument’s sake, let’s say that you’ve done all of that and your brick-and-mortar store is celebrating its second anniversary. However, all the excitement and shininess of your new store has worn off, and fewer customers are walking through your doors. Now what? Do you become a statistic and resign to failure, or do you take the time to figure out where you need to adapt in your business? As a business founded by a fellow entrepreneur, we know you’re likely to choose the latter.
Part of maintaining a sustainable business model is to provide your customers with value and set yourself apart from competitors.
In business, this is known as your Unique Value Proposition (UVP) — what differentiates you from your competitors. In a sea of food trucks gathered in a parking lot for a food truck festival, how will yours stand out? Is it the food? Is it the service? Is it the neon hues and festively decorated truck? Is it the daily social media promotion? Likely, it’s all of the above.
Know what sets your business apart from others and build your brand around it. These are the qualities that give you the most significant advantage over the competition.
In case you’re wondering, here’s how we differentiate ourselves from the competition.
2. Failure to Listen to Customers
If you have trouble defining your UVP, start by taking into account your customers’ feedback. Your customers are a wealth of knowledge, offering a perspective that may not be as obvious to those intimately involved with all of the details of the business.
In our digitally obsessed society, it’s easier than ever for customers to share their thoughts and opinions about the businesses they interact with— which means it’s easier than ever for business owners to monitor and solicit customer feedback.
Not sure where to start? Here is a list of channels to help you monitor feedback and engage in conversations with customers.
- Social Media. All social media platforms (Facebook, Twitter, Instagram, Pinterest, etc…) are great social listening tools that make it easier than ever to listen to your customers.
In fact, in today’s world, using a social media platform to contact a business is often preferred by customers as a faster alternative than traditional phone calls. Thanks to push notifications that alert you when your business has been mentioned, re-tweeted, liked, pinged, or poked, knowing when to engage with customers is easier than ever.
- Yelp Reviews. Yelp is one of the go-to destinations for people who want to find local businesses. With over 148 million cumulative reviews, it’s also a great place to find out what customers are saying about their experience with your business.
- Google Reviews. Just like Yelp, this a more passive channel than social media, but nonetheless, very important. Google is dominating the review market with 6 in 10 consumers now looking to Google for reviews. Since literally everything is Googled these days, your business’ Google reviews are likely one of the first things a user will notice about your business.
- Dedicated Customer Advocacy Websites. One of the most trusted websites for consumer reviews is Trustpilot. With over 45,000 new reviewers each day, they’ve built an entire online review community dedicated to helping customers share their genuine experiences.
On a personal note, we’re proud to say that our customers have shown us a lot of love on Trustpilot, and ShopKeep is currently ranking as the number one provider in the cash register and POS terminal category.
- Customer Surveys. Surveys are still one of the best ways to ask customers specific and direct questions. If you collect customer email information at the point of sale, you can quickly identify your top customers and previous customers who are less engaged. Using this data, you can create a survey for free using SurveyMonkey to find out how you can improve your business. It doesn’t hurt to offer an incentive for completion, like a discount on their next purchase.
With 85 percent of consumers saying they trust online reviews as much as personal recommendations, it’s imperative that your online reputation is intact so that potential customers aren’t turned off by poor reviews — at the very least you should try to make sure your positive reviews outnumber the negative ones.
3. Poor Management
Behind any successful business are great leaders and effective management practices. A lack of either of these can lead to poor decision-making and confusion about who’s in charge, leading to conflict among staff, poor morale, and reduced productivity.
While dysfunction can happen at any level, when it happens at the top, the domino effect can be catastrophic. CB Insights released a start-up business analysis of 101 failed companies and all of the reasons come back to a common theme of poor leadership.
4. Inventory Overages and Shortages
Poor management can often lead to inventory shortages and overages — silent cash flow killers. Inventory imbalance is a huge deal. According to the Small Business Administration (SBA), poor inventory management is amongst the reasons why small business owners fail.
Poor inventory management is a rookie mistake that easily happens to new businesses that don’t understand their sales patterns. The best way to combat this is to use inventory management software or a Point of Sale (POS) system that can track inventory and provides reports detailing your best and worst selling products to help you identify sales patterns.
If you’re not keeping track of your top selling items or when they’re in high-demand, you’re going to experience inventory shortages that will shrink your profits.
As business owners, you take on a risk when you buy large amounts of inventory with the goal of selling it for a profit. If you don’t sell those products as quickly as you forecasted, they can lose value or become obsolete. This forces you to sell them at a deep discount, or not at all.
Until you can recoup your money by selling the inventory you have on hand, your capital will be tied up in a lot of unsold inventory.
Picture this. Instead of thinking of stock items as inventory lining your shelves, think of it as piles of cold hard cash. Each product in storage or your local warehouse is cold hard cash you’ll never see since it’s not contributing a return on investment (ROI).
The harsh reality is that U.S. retailers are sitting on $1.43 of inventory for every $1.00 in sales they make. Proper inventory management will ensure you’re not one of them.
5. Physical Stores and Online Stores are Managed Separately
If you’re a business that also sells items online, this adds another layer of complexity to inventory management that can hurt your bottom line.
Typically, physical stores and digital stores will share inventory. And while you may keep them in separate storage areas, if you sell out of an item online faster than in-store, you’ll have to fulfill some of your online orders from your store inventory. Unless of course, you’d rather ship to your warehouse first and then ship to the customer — causing unnecessary delays and a poor customer experience.
To avoid this, invest in a point of sale system like ShopKeep, which automates the exchange between online and physical inventory. This means, if someone buys a product online, your POS system is also updated with the sold item.
6. Poor Accounting and Bookkeeping
If your inventory is in complete chaos, chances are your finances aren’t too far behind. From insufficient capital when getting started, to cash flow problems induced by bad inventory management, your books are likely getting a workout, and not in a good way.
To make set your business up for long-term success, it’s absolutely critical that you track every dollar coming in and out of your small business. We know this doesn’t make your day-to-day any less challenging, but know you’re not alone.
According to a poll conducted by SCORE, 40 percent of SMBs agree with you. Specifically, 47 percent said they disliked the financial costs associated with bookkeeping, and 13 percent dislike the administrative headaches and the amount of time it sucks out of their workday.
So, what’s the solution? Since traditional accounting methods are limited and plain inefficient, using cloud-based accounting software like QuickBooks Online is the most cost-effective way to streamline the bookkeeping process.
If you’re a brick-and-mortar store and use an iPad cash register or POS system, make sure it integrates with an accounting solution so that you can automatically sync your sales data with your accounting data — something you’ll thank yourself for come tax season.
7. Low Net Income
If you have a low net income, you may not make it through next tax season. If it’s not clear by now, let’s just state the obvious. You absolutely cannot run a growing business unless you have complete visibility into the revenue you collect and the expenses you pay. Without this knowledge, you are literally flying blind.
On the expense side of the equation, if you want to buy a new line of inventory or make some updates to your storefront, you need to know how it’s going to impact your bottom line. And it’s not just these expenses you need to keep an eye on, but all of your costs.
As a business owner, you need to know what percentage of revenue you can allocate to employee wages, utility bills, or rent so you can set proper targets for cost savings. On the revenue side, you want your business to grow month over month or year over year.
If you don’t achieve your goals, you may want to examine areas of your business where you’re overspending — i.e., the expense side. To ensure your expenses don’t exceed your revenue and turn your business into a failure rate statistic, it’s helpful to know your net income.
First, you need to define your Gross Profit (GP) by taking the Cost of Goods Sold (COGS) and subtract the number from the total net sales. If you’re using a POS system like ShopKeep, you can find reports like these, and more in BackOffice.
The second factor you’ll need in this calculation is your Operating Profit (OP). To find the OP, you need to subtract your operating expenses (i.e., payroll, rent, utilities) from your gross profit. If you’re using accounting software, you’ll easily be able to retrieve this information.
Lastly, you have non-operating expenses. These are expenses that are not related to core business operations like your operating profits, but rather taxes or interest you may have on loans or cash advances. Non-operating expenses are subtracted from your operating profit to yield your net income.
8. Lack of Real-Time Data, Reports, and Analytics
Somewhat related to net income but on a more granular scale is lack of real-time data, reports, and analytics. If you don’t have insight into the performance of your business in real-time, it will drastically limit your ability to make smart, data-driven decisions.
Real-time data dramatically reduces lag time between data collection to data analysis, thus making your business more agile and responsive to changing trends. And if there’s one thing every small and medium-sized business has over big-box retailers is the innate ability to be agile because they don’t have to cut through the corporate red tape to make changes. They can see the data trends in real-time and respond accordingly.
9. Assumption and Complacency
This last reason is one that may not be as obvious as our others on this list because it’s not directly related to tasks you need to perform like inventory or accounting, but rather an attitude and mindset — and it does have an effect on your bottom line.
Often, small business owners become set in their ways when it comes to doing certain things. This is especially true for veteran business owners. For new entrepreneurs, make sure you don’t fall into this trap. And to be fair, it’s not just business owners. It’s everybody. It’s human nature, and we are all guilty of it at some point in our lives.
Assumption and complacency typically happen when a business is doing well and fall into a false sense of security that your business is operating in the best possible and most productive way. That’s precisely when fallacy swoops in and wreaks havoc if you’re not careful.
Have you ever heard of the term ‘lean business’ or what it means to operate a ‘lean business’? For those of you that haven’t, a lean business is a long-term, ongoing strategy that strives to eliminate waste to improve efficiency, agility, and quality of business operations — all while maximizing value to customers.
While this seems like a contradiction, doing more with fewer resources, it’s much easier than you think once you break it down into small steps. The ideology of a lean business is built on the methodology of build-measure-learn.
- Build. The main idea behind build is that Rome wasn’t built in one day. Nor was Google’s Gmail, Apple’s iPhone, or mega-retailer, Amazon. Businesses don’t start out doing all the cool and fancy things they’re known for today. For instance, Amazon started as an online bookstore, and now they deliver groceries to your and provide streaming music services.
The point is these companies started with a basic idea, or in the business world, a Minimum Viable Product (MVP) that they can introduce to the market.
- Measure. Next, these companies measured. They measured the results of the MVP during the experimental stage. How did the market respond to your product or business? Did they react the way you expected them to, or was the reaction the complete opposite of your hypothesis?
- Learn. Once you have some reliable data measurements, you can then determine which direction to move based on the results of that data. Have you been right all along and now you have the data to back it up? Or did the measurements provide you with some insight into areas you can improve?
To put apply this to real-world small businesses, you need to go back and look at your business plan. What are you trying to build? What are your goals? What is the bare minimum you need to get started?
For instance, if you’re going to start a business that specializes in vintage novelty tees, you may want to start out online before you commit to the expense of opening a brick-and-mortar location. This way, you can measure the need and the demand for your products in a more cost-effective way.
If you find you’re selling steadily online, this will also give you insight into geographical regions where sales are originating. For example, your home-based business might be located in Florida, but the majority of your sales are coming from western states like Colorado or Washington. From this data, you may conclude that if you want to have a successful storefront, Florida may not be the right location.
On the other hand, you may interpret it as you need to make a harder marketing push in your home state to garner more sales out of the local market because you don’t want to pack up your life and move west.
Whatever the outcome, know that it is backed by reliable data that you can trust to help pivot your business in the direction that will help it be most successful.
Operating a successful business is not something you can leave up to chance or luck. It takes a clearly defined business plan, strategic operations, and sound financial management from startup and throughout the life of your business. These nine reasons give you a solid understanding of how to turn around a failing small business and make sure your company doesn’t fall victim to a failure rate statistic.