Why did small businesses fail? Is any of your friends, colleague, or relative has started his own business? You know, starting your own business is not everyone’s cup of tea. Starting a business required courage, risk-taking ability, and entrepreneurial skills. You can pursue a business very easily, but what makes it difficult is making a profitable business.
To build a profitable business, you must have the mindset that generates excess cash; and that excess cash can build assets, that can run a successful business much faster.
But what happens why most of the small businesses fail? Below are numbers which shows you the reality about small business fail.
20% of small businesses fail in just 1st year.
34% of small businesses fail in the 2nd year of its operation.
50% of small businesses fail in the 5th year of its operation.
70% of small businesses fail in the 10th year of operation.
These are some scary numbers which show that 70% of small business fail in 10 years of their operations. It is a huge percentage of business failure.
I have also started my own business and get failed in just 3years and a million lost. There are so many mistakes that I realize after that failure. If you understand those mistakes of others, you can avoid your failure.
Here are some reasons why small businesses fail:
The major reason why small businesses fail is a lack of financial knowledge. Small business owners do not maintain their balance sheet, P/L statement, and cash flow statement properly. They invest capital, but due to lack of assets and liability differences, their capital is of no use. Due to financial literacy small business owners not able to utilize their investments. Sometimes they buy machinery or equipment which they do not have a use.
Small business owners often do not understand how much money they require for their business setup.
In my own business, these mistakes are done by us. We were typical small business owners who invested money without knowing how much is required. Yes, we have done some work before the start, but we are never able to stick to our plans. Even we invest some portion of our money into those equipment’s which we never use in 3 years of business operations.
Above all, we have no clue about cash flow statements, P/L statements, or balance sheets at that time. We were financially illiterate people, and our small business fail.
TACTICAL VIEW RATHER THEN STRATEGIC VIEW
Another major reason for small businesses fail is the tactical or technical view. What happened, people who ever doing a job is somehow is doing technical work. Either you are an engineer, doctor, or accounts person, machinist whatever you are, you are doing technical work for other people. Commonly, a person who is doing technical work thought, they can do that business too and starts their own. When they start, their problems start. They have less time, more work, doing those work that they do not know.
Due to the lack of concepts of OPT (Other people’s time) or OPM (other people’s money) that suggested by Robert Kiyosaki, their small businesses fail.
We have also started a business with technical knowledge. Our full focus was on technical things and forget the actual strategic view on which we should focus. We failed to understand the market and the competition. On the very first day, we were at the backfoot when we got to know the actual product price in the market. There was a huge price difference in the product that we thought and in the market.
SMALL BUSINESSES FAIL WITH SMALL MARKET OR NO MARKET
People start a business sometimes with the wrong motto. They just start to get more money. But business cannot be done with thinking to get more money. Businesses can only be done to provide things that are necessary for people in the future as well.
So, some people start with the same product or services which already available in the market and face serious competition. Some other business starts with a product which does not require in the market.
“Business owners need to keep tabs in the market and customers changing needs on an ongoing basis, as well.”
TRYING ALL WORK BY YOURSELF
The major problem with small business owners is that they do all the work by own. They do not trust other people to work properly. They view themselves as a jack of all trades. But entrepreneurs have strengths and weaknesses. They cannot do all work alone. Hire a qualified person and put some responsibilities on their shoulder and free yourself and start thinking about other major work. Doing all work alone will lead you to failure.
“If your business depends upon you, you don’t own a business – you have a job. And it’s the worst job in the world because you are working for a lunatic.”
LACK OF NEW PRODUCTS
I have read a book, “Zero to One”, in which the author clearly stated that if you grow in your business you must grow vertically rather than horizontally. Here, vertical, or intensive growth means doing new things – going from 0 to 1. It is harder to imagine.
Horizontal or extensive growth means that, copying things that were going from 0 to n. It is easy to do.
Generally, small businesses fail because of this horizontal growth. They have products which already available in the market. The lack of new products not able to sustain in the market, and in the end you fail.