why most small business fail

42 Costly & Unnecessary Mistakes Business Keep Making

The real reason why most small business fail is our ability to react to changing conditions, to implement the necessary changes and improvements in 6 basic areas of your business. There are many reasons why most small business fail or finds itself with declining profits, sales, cash flow. But the largest single cause of most small business failure, is management failure. 

How do most small business fail

Every reason for success and business failure, except for a few external reasons like sudden illness, legal challenges, natural disasters or unfavorable government policies can be found within these 6 areas:


  • Money
  • Management
  • Marketing and Sales
  • People
  • Product and Service
  • Process and Systems

Why do most small business fail

Take it from someone that have failed many times in business. After owning 40 of my own businesses I agree with many business analysts that out of the top 6 key business drivers, poor Money Management is the number one reason why most small businesses fail or go bankrupt. Let's look at the top reasons in each of these key business drivers

Reason 1 Money

Money will always be the biggest challenge and concern for a small business owner. All growing small business has one thing in common: They always need a lot more money than they’ve got, and the faster the growth, the bigger the gap. Money management is the One key factor responsible for most success and failure in small business. Under these are the  "6 Biggest Money Mistakes Responsible For Most Businesses Failure" and "The Real Reason Behind These Money Mistakes In Businesses"


Declining or Low Profits - Profits are steadily declining or are very often too low with regard to the amount of effort put into the business. 


Reduced Margins - Margins are reduced due to price-cutting or increased costs of materials, products or services, etc.


High Costs - Expenses are steadily increasing, but turnover is either stagnant or declining. Businesses with a higher cost structure than their major competitors are likely to be at a competitive disadvantage and unable to compete on price.


Increases in Variable Costs - Variable costs of the business are increasing disproportionately in relation to sales. Prices aren’t being adjusted to compensate for the increase. 


Increase in Fixed Costs - Fixed costs are steadily increasing, or aren’t under control.


Lack of Adequate Cash Flow - The business owner is continuously short of cash, with the business unable to pay its bills on time.


Poor Credit Control - Giving credit to businesses without doing a proper credit check – selling to people who cannot pay.


Overstocking - Business uses incorrect purchasing methods.  Doesn’t know which lines are fast or slow moving, which lines are obsolete. 


Overdrawing - Owner’s drawings are increasing in relation to business’s profits.  This normally takes place in small businesses.


Incorrect Pricing Structures - Over or under quoting continuously.  No costing structures in place, i.e. Unable to establish ‘true’ cost of products, or service.


Uncontrolled Growth - Sales are growing faster than the business is able to generate finance for growth, with bank borrowing being inadequate or too late.


Poor Working Capital Management - Management of debtors, stock, creditors and cash balance.  This leads to the business being short on working capital and unable to fund growth.  Working capital is used to fund debtors and stock.


Inadequate Financial Controls - Lack of financial controls is a major problem; usually this leads to a situation where business owners run out of cash and are unable to pay their accounts.


Poor Working Capital Management - Management of debtors, stock, creditors and cash balance.  This leads to the business being short on working capital and unable to fund growth.  Working capital is used to fund debtors and stock.


Poor Cash Flow Control - More businesses fail due to cash flow problems than anything else. Without an adequate inflow the business will slowly die.  You must develop a cash generating system for the business and have a good cash flow monitoring system that will give you an early warning of problems ahead.


Financial Management - Don’t know and understand your numbers. It is vital to understand your financial information, set daily weekly, monthly cash flow, sales and profit targets and forecasts.


Underestimating Real Cost - This is very common for owners not to know what their real cost is for producing the product or service that leads to poor profit margins.


Inadequate Management Information - Information is outdated, i.e. using information extracted from the balance sheet, or income statement, which can be up to six months old or longer after financial year-end.


Inadequate Financing - Inadequate access to working capital and other financing options is a huge contributor to a business's lack of success and ultimate failure.


Over Borrowing -  Try to borrow you out of a cash flow problem. As a result, the company may not have the cash flow to repay its borrowed funds.


Big Projects - Business owner’s under-quote on a project for fear of losing a job, or over-quote as they do not understand exactly how much the product costs. Margins are reduced due to price-cutting or increased cost or products.


Premature Expansion - Expansion is a good thing if it is done at the right time. But, if you scale your business prematurely, you will destroy it.

Reason 2 Marketing


Competition - Assuming no competition or ignoring the competition. Not having a clear understanding of the competitors’ strengths, limitations, pressures, costs, profitability, market and strategies.


Diminished Customer Base – The business’s customer base is shrinking, moving to the competition, moving out of the business’s target area.


Lack of Marketing Efforts – Can’t generate sufficient leads and turn them into customers. No consistent marketing schedule.



Failure to Increase Sales and Revenue - A business can have a wonderful product, but unless it spreads the word, prices its products properly, and influence customers to buy, the business won’t generate sales and profits. 


No Clear Marketing Message - An inaccurate understanding of what target customers wants and needs.


No Edge - A great product is not enough. You also have to develop an ultimate advantage. Something that sets you apart from the competition.

Reason 3 - Management


No Time Management – Owners manage their time ineffectively becoming involved in unimportant matters to the detriment of profit and cash flow.


Poor Business Planning – The business often has no business plan to monitor and gauge whether it is achieving its objective.  The owners consider planning an academic exercise and a waste of time.  Runs around putting out fires and management by crisis are the order of the day.


No Succession Plan –The business is operating without a succession plan.  The business has no focus, direction and no adequate business plan.  If this is the case, the business is only a heartbeat away from financial chaos.  If the owner dies suddenly, or becomes unavailable for the next six to nine months, has anyone been trained or groomed to take charge?


Management Characteristics – Does not recognize the need for change.  No passion or drive, under stress, burnout and personal issues. Unwillingness to take responsibility and unrealistic expectations.


Poor System and Process of Control - This is key for growing, scaling and expanding your business. To develop a simple repeatable and proven formula, to do just that


Wrong Partners – It’s easier to succeed in business with the right partners. But the wrong business partner will destroy your business. For most small businesses a partnership is sinking ship.

Reason 4 - People


Low Staff Productivity – Staff demotivated and demoralized; Poor or no accountability and performance monitoring.


The Wrong Team – Not able to find and retain qualified employees. Business experiences high staff turnover and absenteeism.


Team Alignment – Unclear goals. Failure to aligning employees with business goals.


Communication - Poor communications throughout the business


Training - Failure to train team.

The Last reason - Product and Service


Poor Product - Poor quality, design, packaging and on time delivery can hinder your long-term growth, damage profitability and lead to excessive stock and large inventory write-offs


Bad Customer Service - Customer service is extremely important. Poor service can make a significant impact on sales and profits. 78% of customers ended a business relationship because of poor customer service.


Lack of Industry Experience - It takes more than a good idea and passion to turn it into a profit business. It’s important to choose an industry where you can achieve sustained growth. You will increase your chances of success if you know the industry.


Product or Market decline – No real market demand for the product or its target market is declining.  Not responding to changes in demand for the product or service; waiting too long to respond to changing external demands.   The business is becoming absolute such as the selling and repairing of typewriters.

Now that you have a much clearer picture of why most small business fail you can start looking at your own business and evaluate every one of the 6 areas in business and see where can you start making some improvements. Remember that business success lies in mastering the basics. But you need to follow a simple step by step method that will fix you're failing small business and keep it fixed. 

It's about focusing on producing greater results and performance from the same activities, the same capital, and the same people. It’s about getting substantially more for less, optimizing and multiplying the results in your key business drivers with minimum effort, expenses and risk.

About the Author Hans

Hans had 40 of his own businesses over the last 30 years and is famous for creating fast-growing businesses” He is an author, speaker, coach, and consultant and a specialist in business optimization and turnaround, helping smaller business owners eliminate business limitations, threats, and growth challenges in achieving their sales, profit, cash flow, and income goals with sniper precision.

follow me on:

Leave a Comment: