5 reasons why small businesses fail (and how to avoid them)

Running a small to medium-sized business can be tricky. Usually, you’ll have little to no staff to help, you’ll have a lack of marketing know-how, or you may have hit a rough patch you just don’t know how to get out of. You may be wondering if you just weren’t cut out to run a business. And we’re here to tell you otherwise!

It is estimated that one in three new small businesses fail in their first year of operation in Australia and three out of four by their fifth year. Most likely it’s not you or your passion, but instead your business systems have failed to bring you long-term success. To ensure your small business doesn’t fail, you must continuously learn from your own mistakes and the mistakes of others.

At Brainiact, we’ve learnt from high-level business professionals, through our talk show Leader Talk, about how small businesses can flourish and overcome every obstacle. Here we outline five common reasons why small businesses fail and how to avoid them, so you can ensure your business is here to stay for a long time not a short time.

Inadequate management
When it comes to small to medium-sized businesses, management is everything. In fact, 90% of small businesses fail because of poor management. While this stat may elicit fear and trepidation in you it’s actually a positive! If you know that 90% of small businesses fail because of poor management then you know how you can improve right off the bat. 

Often SME leaders have a limited understanding of the business space or are the only person in a senior managing role that has prior experience. This isn’t necessarily a negative but instead something to keep at the forefront of your mind, so that you can recognise when poor management may be impacting your business.

Smart businesses recognise areas where they might not be as strong. Whether it’s managing your finances, delegating tasks, or understanding complex business models it’s okay to not be the best at everything. Here are three practical tips to help you become a star manager:

  • ask for help – Knowing when you’re out of your depth or need additional knowledge isn’t a sign of weakness but actually a strength! Check out our blog post for more information.
  • set achievable goals – By setting concrete goals you are creating the beginning of a smart business plan (sneak peek: the next reason why businesses fail is because they don’t have a plan!) which will allow you to understand where your business is going and how you can get there.
  • there’s no ‘I’ in ‘team’ – When you have a capable and intelligent team, there’s no reason for you to have to micro-manage. In fact, a survey completed by Trinity Solution found that 85% of people state that micromanaging negatively impacts their morale!

A lack of business planning
As the old saying goes, “failing to plan is planning to fail.” It may be cheesy but it’s honestly true! A lack of a business plan means that your business has no goals, no strategies, and no real reason to succeed. If you’re scrambling to think about what you want to achieve in the future and how to actually get there, then it’s time you created a business plan (fun fact we actually have a detailed blog post all about business strategy – check it out).

Just like in life, when it comes to planning for the future you have your short-term and long-term plans. While long-term plans are probably more important for businesses, short-term goals and ambitions allow you to not only achieve your long-term plans but also allow you to keep the momentum going. Short-term plans are just that, they should be in the short-term. Think about where you want your business to be in the next few weeks and months and plan how you are going to achieve them. Remember, these are short-term goals so while they should be ambitious they must be achievable.

Long-term goals are where you want your business to be in the next year or longer. These ones are important as they set the trajectory of your small to medium-sized business and also set the tone of your short-term goals. These need to be big and ambitious but also achievable. There’s no point saying you want to be the size of Amazon in a year’s time, as it’s just not feasible.

Your goals should be developed under the SMART system. SMART is an acronym for specific, measurable, attainable, relevant, and time-based. It’s all well and good to say you want your business to be successful in the future, but what does that actually mean? Creating SMART goals will allow you to execute your business plan successfully.

Here are a few practical tips to creating and implementing a successful business plan!

  • Map out and plan your projected cash flow and budget.
  • Create achievable and smart marketing strategies.
  • Have a detailed understanding of who your competitors are.
  • Create a business description and understand your business’s purpose in the market.
  • Recognise your current employee status and whether this need to alter in the future to allow your business to continue to be successful.

Weak leadership
While businesses are built on teamwork, leadership plays a massive role in a successful company. Being a strong leader doesn’t mean that you’re heartless or uncompassionate, nor does it mean you’re a gym buff. Being a strong leader means that you’re organised, resilient, a good listener, and innovative.

Ensuring you encourage open communication within the workplace is a great way of creating a company culture that promotes innovation and out-of-the-box thinking. Strong leadership enables businesses to achieve their ambitions and continue to progress the company forward as it promotes loyalty and motivation. Weak leadership on the other hand demotivates individuals and creates an unproductive environment. In fact, 72% of Australians leave their job because of poor leadership. Check out our talk show Leader Talk where we interview a high-level leader every week to find out more!

Overdependence on a few customers
We love loyal customers that spend a lot of money, but they shouldn’t be what you rely on. Why? Because if they stop shopping with you then you’ve lost a big chunk of your market and your business will be close to failure.

 Every business of any size strives to increase their customer base, but it can be a challenge to do so. With such a saturated market nowadays, SMEs may struggle to find a large customer base that isn’t reliant on a few big consumers. It’s important that you take a look at your marketing strategy before anything else. Are you reaching a large audience? Is your ROI improving month to month? Are there different marketing channels you haven’t tried yet? Marketing is an important way small to medium-sized businesses can gain a profitable and large customer base.

Other than marketing, it’s important businesses who are struggling to locate new customers analyse their web design and social media channels. Maybe you are marketing everything correctly, but your user experience and customer journey is too long and difficult. Your website should be practical and easy to use, not just aesthetically pleasing. Ensuring your business develops and has a strong customer acquisition channel is crucial to longevity. How are customers supposed to buy your products or services if you lack effective call to actions, an enjoyable user experience, and a short and simple customer journey?

When your first starting out it can be exciting to gain any customers at all, and while this is a great achievement you should constantly evaluate your marketing and customer acquisition channels to ensure that you can continue to grow. While every business is appreciative of their big spenders it can become dangerous if you grow an over reliance on them. Remember to always strive to gain more and more customers!

Lack of innovation
Uh oh, we’ve reached the dreaded word ‘innovation’. While every business knows deep down they need to constantly innovate many fear it and see it as a daunting task that is difficult, time-consuming, and expensive. But it doesn’t have to be! In our chat with Justin Burgess, he explained exactly why companies need to innovate and offered some practical tips to make it easier.

Innovation doesn’t have to involve coming up with a brand-new product or service every week. It can be as simple as changing your email marketing to one day a week to three days a week. Innovation is what enables businesses to grow and expand and it prevents businesses from becoming stagnant and unable to improve. While it can be difficult to change your mindset to an innovative one it’s important that you never feel comfortable in where your business is at because that can only last so long. Here are three practical tips to ensuring your business remains an innovative leader:

  1. Always think about the bigger picture. As our chat with Mark Burgess illuminated it’s important every business has a ‘start local, go global’
  2. Look for small areas of improvement each week and then implement those changes.
  3. Encourage open communication within your workplace to ensure that everyone’s ideas are heard and can be discussed without fears of repercussions.

At the end of the day, we at Brainiact understand just how difficult it is to run a small to medium-sized business – that’s why we started! While each business is different it’s important to recognise ways you can improve before your business is too far gone to save. By understanding these five common reasons why SMEs fail it can equip you with the knowledge to not let it happen to yours.

If you feel overwhelmed or like you need some additional help then contact us today. We are an affordable and expert monthly subscription-based business that will provide you with critical information to help your small to medium-sized business thrive.