Small Business – Reasons for Failure and How to Avoid It

Sakshi Jain
Sakshi Jain at March 14, 2023

Table of Contents

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Know Reasons for Failure of Small Businesses

There are various reasons for failure of small businesses. However, there are several ways to avoid these small business failures.

The following topics have been discussed in this article:
Table of Contents
Why Do Small Businesses Fail?
How to Avoid Failure?

1. Why Do Small Businesses Fail?

Most small businesses fail within first five years of entering into the market. The main reason for their failure is bankruptcy. Inexperienced managements of small businesses do not have a vision in their minds. Their inexperience leads to poor planning of the business which takes it into bankruptcy. After going bankrupt, most small businesses shut themselves down.

The small business failures caused out of poor planning can however be avoided to a great extent. It is important for owners to first educate themselves of the types of planning and the various tactics to improve it. Planning takes more time and effort than its execution. Well-informed and smart planning is essential to the survival of every small business. Therefore, for small businesses to avoid failure, the first step is to formulate and stick to their well-structured financial, marketing, and business plans.

2. How to Avoid Failure?

There are various ways to avoid failure of small businesses. A few of them are:

  • Doing Market Research: Not doing a market research can be one of the most common reasons of business failure. Small businesses should be aware of their product market, product pricing, and their ideal customers. They should formulate a well-researched business plan so as to guard the business against failure. A business plan should incorporate market research which will tell the scope of the product offered by the small business.
  • Sorting Funds: Calculating the funds required to run the business out of your own pocket is important before starting a small business. An informed estimate must be made to divide the owner’s money into the amount required to run a livelihood and the amount required to start a business. This will ensure that the business is not affected at the expense of livelihood and vice-versa. Finding a balance between the two will help in running both the small business and home effectively.
  • Choosing a Feasible Model: Formulating a business model is essential to every small business. Choosing the right model based on the business type will determine the successful life of the small business. Small business owners are required to allocate proper funds by making well-informed estimation of how long it will take for the business to generate enough profits which can be re-invested in the business and out of which a living can also be made.
  • Growth Plan: Small businesses need to have a growth plan of how the business is supposed to grow over the years. Timely goals of the business must be set which can be achieved step-by-step. Transition plans for the small business should be created so that it does not stagnate after a point of time. This will help in paving a successful pathway for the business which will lead it to where it was initially envisioned.
  • Exit Strategy: While starting a small business, every owner has a vision where s/he sees the business to be someday. However, most owners don’t have a plan about what will happen to the business after they have achieved their aim. A majority of small business owners plan to sell their business after they retire. However, sale of a small business depends on its ability to be sold. The small business should be structured in such a manner that it does not stay dependent on particular individuals. Therefore, the exit strategy of a small business should be formulated by owners into the business plan so that the business stays in selling shape even after its owner retires. This exit plan should be chosen while starting a business and not when leaving the business. There are various other ways to exit the business such as family succession, but all of them require the business to be in proper shape.
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