The Top 3 Reasons Why Businesses Fail

small business failureThey say that knowledge is power. I agree but, of course, if we do nothing with that knowledge, then we could end up being an encyclopedia of useless knowledge like Cliff Claven. Claven was the postman who sat at the end of the bar in Cheers, spouting off useless information. As Cliff once famously said, “It’s a little known fact that the tan became popular in what is known as the Bronze Age.”

So how about some relevant information that we can do something with? According to Clate Mask, the founder of Infusionsoft, 83% of the 28 million small businesses in the United States are solo-preneurs who do less than $100,000 in annual revenue.

Then 6.1% do between $100,000 – $300,000 in annual revenue, and another 6.8% do between $300,000 – $1,000,000 in annual revenue. If you add all that up, it means that nearly 96% of small-business owners have never done $1 million in annual revenue.

So with that breakdown, we understand what the small-business landscape looks like. According to Michael Gerber, author of The E-Myth, 80% of businesses fail in the first 5 years. Then, of the 20% who are still in business after 5 years, another 80% of them fail in years 6-10. That leaves only 4 out of every 100 businesses that will still be in business after 10 years.

In my experience of working with small-business owners throughout the country, I have found that there are 3 main reasons why they fail.

Reason #1: Poor or Lacking Leadership

I know this one kind of hits home, but it’s true. The leader or leaders determine the direction of the business, because they make the decisions. Interestingly, as Jim Collins clearly illustrates in Good to Great, it’s actually not really about the product or service. With the right people, businesses succeed. With the wrong people, they don’t.

As Tony Robbins says, “resources are valuable but resourcefulness is invaluable.” Great leaders resource themselves. They learn. They read great books. They have a plan. They execute. They are not afraid to make mistakes. Then when they make mistakes, they learn from them and continue executing and taking action.

Reason #2: No Marketing Plan or a Bad Marketing Plan

As the legendary management consultant Peter Drucker said, business all boils down to two things – innovation & marketing. Remember, marketing generates the leads, and then sales closes them. No matter how cool your widgets are, if the world doesn’t know about them, then you’re on your way out of business.

What is your marketing plan? Is it clear and concise? Does it recognize and incorporate the new ways in which consumers buy products and services? It’s a different world today than it was 10 years ago, so your marketing “plan” should reflect that. Yes, I said “plan.” Things like social media should weave into your overall marketing plan.

It’s important to have a strategy and then to employ a variety of tactics to get there. But you have to understand the things you can do in the marketing space, create a plan, execute on that plan, and then measure its effectiveness.

Reason #3: Lack of Access to Capital

Have you ever seen or heard of someone whose business failed because they had access to too much funding? I haven’t seen that one either. I have certainly seen businesses who didn’t use their funding wisely, or who could have used it more effectively. However, I’ve yet to see someone fail because they had a lot of access to capital.

So the issue is that people need to learn how to access capital. If you look at the glass as half-full, then that means capital will help businesses grow, thrive, and last longer. If you see the glass as half-empty, then you’ll say that access to capital just allows companies to stay afloat longer. The truth is surely somewhere between those two extremes, but here’s what we can absolutely say. When people wisely use their funding and capital, then they can absolutely grow their business and add value to their company. I collaborated with NY Times blogger Barbara Taylor on a relevant report on the best ways to use your funding for maximum results.

There are certainly many, many reasons for business failures, but these are the most common reasons that would explain them. The beauty is that when we do fail, we can get back up and try again. If you’ve had a business that didn’t succeed, then join the club. Just don’t throw in the towel. Your successful business might be the one you haven’t started yet.

Author:

Tom Gazaway is the founder and President of Hawkeye Management. He is widely known as the country's foremost expert in unsecured lending solutions for small-business owners. He has written many blogs, reports, white papers, and eBooks about small-business credit and financing. Tom has extensive training and over a decade of experience in a variety of debt creation and debt management strategies that allow his clients to protect, preserve, and improve their credit profiles as they obtain funding. He is a Certified Credit Expert Witness (CCEW), and also has his FICO Pro Certification. He is one of the few people in the country who holds this particular combination of credit certifications. Hawkeye Management was named as one of the 50 fastest growing companies in the PA, NJ, DE tri-state area by Smart CEO Magazine in December 2012. His company helps both startup and established small-business owners to obtain the capital they need to start, build, and grow their companies so they can achieve their business goals and dreams. They offer a variety of small business loans and working capital solutions for small-business owners. Tom grew up in Marshalltown, Iowa and received his B.A. degree in Economics & Finance from Westmont College in Santa Barbara, CA. Currently, Tom lives in Blackwood, New Jersey with his wife Melanie and their three sons Aiden, Zander, and Micah.