Why Do Small Businesses Fail? — Common Mistakes That Affect Success In Business

This article was first published on Magic.

Most entrepreneurs possess the industry skills and product knowledge to bank on the success of their new venture. But why do small businesses fail despite that? There’s no one reason but certain patterns and mistakes can be found in most startup stories. These pitfalls are often ingrained into their workflows — cash flow management, insufficient market research, pricing issues, and team composition.

Insufficient Market Research

A business is least likely to survive when it doesn’t understand its market. It’s a common mistake for small businesses or startups to make assumptions about their customers, their pain points, and their needs. Conducting market research gives companies insight into the following:

• Customers’ buying patterns
• How many customers prefer Type A over Type B, and vice versa
• How much they’re willing to pay
• How many would buy at a certain price point
• What’s driving customer satisfaction
• The competitive landscape
• More accurate forecasts

Entrepreneurs often come up with ideas for novel products and services, but having an amazing product doesn’t always translate to higher sales. In fact, CB Insights found that targeting problems with novel solutions rather than actual market needs was one of the top reasons for business failure for 35% of their case studies. Without the proper research, you might end up running a business that no one has much use for.

On the flip side, there are small businesses that try to reach as many customers as possible from the start. While that is a valid goal, getting there is an incremental process. Focusing on a niche market, at least at first, will help you expend the right amount of resources, reinforce your brand identity, and build strong client relationships.

Even strong brands have made this mistake. Such was the case for Coors. When bottled water became popular in the ’90s, Coors released their own sparkling water to keep up with the trend. But they failed to consider one thing: their brand.

Coors was a household name in the beer industry and they leveraged that popularity as they entered the bottled water niche to gain an upper hand. However, despite some customers saying that they liked the product, the majority still preferred other brands whose main selling point was water (not alcoholic beverages like Coors). In this instance, Coors failed to do the necessary market research to predict what their consumer’s response would be.

Poor Cash Flow Management

Money is and will inevitably be one of the business hurdles for small businesses. Small businesses don’t have the budget of an enterprise-level business, which leaves little room for financial errors. Most struggle with sustaining cash and failing to raise new capital, both possible results of poor cash flow management.

Alan Knitowski, CEO of Phunware, saw his first two businesses fail due to poor cash flow. Despite steady growth in both of them⁠, their cash flow became increasingly strained. They caved into customer demands for extended payment deadlines, and accounts receivable took longer and longer to resolve. Ultimately, both companies burned money faster than they could raise funds. One business went bankrupt, while the other was bought by Cisco less than two years from its founding.

After this experience, Knitowski made cash flow management a central focus at Phunware. They gave their management team visibility into their company’s financials by sending an overview of their cash on hand, obligations, receivables, and other data. Then, they analyzed them to track trends and determine what action they should take moving forward.

As daunting as it sounds, cash flow is possible to manage. To ensure that your finances are being managed properly, it is not enough that a manager or even you as the business owner is doing these on your own. Accounting and budgeting should be handled by someone who has the appropriate skills and knowledge to do so. For instance, hiring a bookkeeping assistant will help you manage your books while also allowing you to focus on your other core responsibilities.

Pricing Issues

The right pricing can be the difference between success in business and a rapid downfall. Small businesses must determine a pricing strategy that’s profitable but still competitive — high enough to cover costs and low enough to attract customers.

Hey Tiger, an ethical chocolate brand, struggled with finding this balance so much so that they had closed the brand in May 2021. The brand is committed to raising awareness and addressing some of the inequalities in the cocoa industry. They source their cocoa from ethical suppliers and donate 2% of each block sold to The Hunger Project, a secular charity focused on women’s empowerment, entrepreneurship, and social development. However, scaling the brand into profitability meant compromising the quality of their chocolate and their advocacy.

“As the scale of our chocolate production grew, so did the tensions between the very things that made Hey Tiger special. Ultimately while succeeding in one goal, we couldn’t make the other.” — Hey Tiger

Not Having The Right Team

In CB Insight’s case studies, it was often cited that a diverse team was critical to success in business. Diversity can be in terms of demographics, professional background, expertise, and even personal interests. Each team member then must possess the appropriate qualities to fulfill their respective roles while also being aligned with the company’s core values and overall culture.

This was an area that Fieldbook, a high-flying construction startup, faced challenges in and one of the reasons for its downfall. As Fieldbook was growing its customer base and preparing to invest in marketing, the team struggled to hire enough talent to fill crucial roles. They couldn’t find a designer and another engineer leaving their growth team understaffed.

“I was blindsided by the difficulty of hiring. Hiring was something I’d done successfully for years, including in the early days of Fieldbook and in a previous startup. But at a time when every engineer wanted to work on AI, self-driving cars or cryptocurrencies, a SaaS startup with modest, sporadic growth wasn’t very attractive.” — Jason Crawford, co-founder of Fieldbook

Having the time and money does not ensure success in business. Businesses today succeed or fail based on their ability to identify their own pitfalls and take action. By looking at the common mistakes previous startups have done, you can create a defined plan for your business starting from its early stages and throughout its lifetime.