The 8 Most Common Reasons For Small Business Failure

How many times have you heard it? A business owner complains about the government, the weather, the this, the that, for the failure of their business.

When, in fact, for most businesses, the statistics you’re about to see tell a very different story. A story that’s important to understand so that you and your team know just how much your own actions ultimately affect the success or failure of your business in a much more significant way.

Some statistics tell it like it really is

Some statistical research on the reasons why small businesses fail provides interesting results. Please note that ‘small businesses’ were defined as those businesses with less than 100 employees. Given that, then, these results apply to one-person small businesses all the way through to larger ‘small businesses.’

Let’s look at them and then analyse the ramifications.

32.1% of small businesses fail due to poor management of financial activities

Not being properly funded or failing to keep a tight reign on debtors and creditors are examples of such issues. If there’s one area that’s a ‘weak link’ for most businesses, this is it!

The vast majority of business owners and managers do not have a great deal of formal financial management skills or training. Let’s face it, most of us aren’t accountants! And often because of this, finances are not a favourite.

Further, most business owners prefer to complete the work the business does instead of fussing over the details. As such, financial control is one of those detailed areas they often avoid.

In this instance, proper controls may not be in place, proper reports telling the owners or managers literally how much profit (or loss) they made at the end of the day—or, at the very least, at the end of the month—may be lacking. Or a business could experience profitable years on paper and have solid debtors; however, due to poor control of those debtors, the business remains cash poor on a day-to-day basis, making payment of creditors a juggling act. This places the organisation, large or small, under financial strain.

These sorts of controls and reporting are crucial for the management of monies in and out of the business. Without it, failure is a serious possibility.

14.6% of small businesses fail due to a lack of management competence or experience

Business owners or managers are often very good at doing the technical work of their business. For example, you could be the world’s best carpenter, photographer, florist, or what have you, but unfortunately, that might not mean you automatically have the skills and experience required to really make the business go. You’ve probably seen examples of this in action.

In this instance, a lack of experience in actually managing a business can be its downfall—being good at what a business does does not necessarily guarantee that the person will be good at managing the business. This makes training, seminars, and information gathering critical to your business.

12.4% of small businesses fail so due to inflation and economic conditions

These are conditions affected largely by internal government controls on currency and interest rates and by other world-wide financial mechanisms. These conditions can also be altered by the effects of weather or natural disasters on an area, a country, or a region of the world. Obviously, these factors are outside your control as the business owner.

12.3% of small businesses fail due to poor books and records

It’s staggering, don’t you think, that the seemingly small task, although a detailed one at that, of keeping good books and records of sales, expenses, etc., can literally bring about the failure of a business!

You see, keeping detailed financial ‘books’ or figures and records can be an issue some business owners or managers avoid. This is very dangerous, too.

It can be likened to driving a car without a fuel gauge or speedometer. Imagine doing that for a moment. How would you feel? Stressed? For sure. Anxious? Definitely. You’d have a constant fear of running out of fuel or breaking the speed limit, wouldn’t you?

Operating a business without good books and records is a similar experience. You never know how much money you have in the bank, where that came from, or who and what you owe, and so on. Ultimately, you have to know where you stand financially at all times. Without that, keeping your customers happy will be difficult, let alone making sure you’re profitable!

10.7% of small businesses fail due to sales and marketing problems

Sales and marketing are areas that many business owners or managers—unless these are their particular areas of skill—find challenging.

The world of marketing is foreign to many people. All the techniques, the do’s and don'ts, the costs, the results, or lack of them, can add to this feeling. For example, many businesses throw good money after bad simply because they just don’t know whether their advertising or marketing actually works. And before they know it, they’ve literally spent thousands and thousands of dollars for little or no return.

Another marketing mistake made by many businesses is to have a constant focus ONLY on winning new customers. For many, this means focusing all marketing efforts on advertising—usually, the most expensive marketing tool.

However, marketing is much, much more than that. It involves keeping customers happy and buying from you again and again, increasing your average sale, improving the processes in your business, AND winning new customers.

To add to that, many business owners neglect other ways of marketing, such as direct mail, host-style relationships, advertorials rather than traditional ads, referral systems and many more. Many fail to consider other issues, like lifetime value, testing, pricing, measuring and managing, and so on.

Worse yet, despite having a good product or service, some people just don’t feel comfortable selling. Mistakenly, some feel it’s ‘hard sell’ to talk with customers about their needs, instead of just giving them a price and letting the customers make up their own minds.

All of these issues can lead to a failure to generate an interest in your business, products, or services, and finally—to sell anything!

9% of small businesses fail due to staffing problems

When asked, ‘What are some of the positives and negatives about being in business?’ most business owners and managers unfortunately place ‘staff’ in the negative column. This is a sorry state of affairs, particularly when you consider that most people want more than a job, and most business owners want team members who will treat their work like more than a job! And despite all the best intentions and desires of both parties, often both will end up with a less-than-perfect situation.

(Although the results refer to ‘staffing’ problems, the word ‘team’ is much more conducive for generating better results and more cohesion within your business. It may be a tiny change, but the difference is huge: Instead of considering themselves ‘just employees', your personnel will consider themselves ‘team members’ and thus responsible for everyone else’s results and contributions.)

You can rectify this by involving your team members more in the overall operation of the business, in projects outside of their jobs, more team activities, more training and education and better communication, just to mention a few.

The other issue here is that businesses are often over or understaffed for their volume of sales. Either of these situations will put undue pressure on the business—higher costs or overworked staff and unhappy customers.

It’s essential to review productivity, too. You see, you could have the appropriate number of staff but, due to a lack or systems or poor work practices, they could be producing very little. This then affects cash flow. All of a sudden, your business can’t deliver in any area.

6.2% of small businesses fail due to union problems

As you may have seen, unions can affect businesses dramatically. In fact, union movement can affect whole industries or entire countries, depending on which union is taking action.

2.7% of small businesses fail due to failure to use external advice

This small category represents the group of businesses that would not have failed had they sought external advice. In other words, people out there could have assisted the business. In fact, so much so that the business would not have had a difficult phase or certainly would not have failed.

This external advice could have come from accountants, lawyers, business advisors, and so on.

So where does this leave you?

Well, take a look at the figures repeated for you here. As you do that, add up the percentages of reasons for small business failure that are external to the business—that is, outside the business owners’ control.

32.1%              Poor management of financial activities

14.6%              Lack of management competence or experience

12.4%              Inflation and economic conditions

12.3%              Poor books and records

10.7%              Sales marketing problems

9%                   Staffing problems

6.2%                Union problems

2.7%                Failure to use external advice


It’s about 18.6%, isn’t it? Inflation and economic conditions at 12.4% and union problems at 6.2% are the only 2 factors outside the control of a business owners or managers. So outside influences account for only 18.6% of the reasons why small businesses fail. That is just amazing!

Only 18.6% is outside your control!

Just to double-check, run through this list again and ask, ‘Is this internal (under my control) or external (outside my control)?’

32.1%              Poor management of financial activities

14.6%              Lack of management competence or experience

12.4%              Inflation and economic conditions

12.3%              Poor books and records

10.7%              Sales marketing problems

9%                   Staffing problems

6.2%                Union problems

2.7%                Failure to use external advice


You’ll agree—every other factor is internal. Which means that you are in charge—you are in control. YOU and your team actually control whether your business survives.

You see, the statistics show that 82.4% of the small businesses surveyed failed because of issues under their control. So, 82% of the time when businesses fail, the owners really could have done something differently to stop that from happening. The problems were actually in their control. This is actually good news!

Fundamentally, it means if you’re having problems in an area of your business, you usually CAN do something about it. With the right help and possibly more involvement with your team, you’d normally be able to get each and every one of these factors in order.

These figures are even more surprising when you consider just how many business people blame the government, the this, and the that for the failure of their business or for tough times (at the same time, talking the economy even further down, by the way!), when, as you can see, the reality is completely different.

To take this one step further, consider this. Many people have actually made their fortunes during recessions or tough times, whereas others have failed just as easily in boom times! Why?

Precisely because of the factors mentioned here.

If more business owners had better control and management of the factors that create that 82.4% of the reasons why businesses fail, chances are their businesses would be booming regardless of economic conditions!

These results show that as much as government policies and economic conditions affect business, your actions and that of your team have a far greater effect on your results than absolutely anything else.

As such, it’s important to look out for these ‘hot spots’ and take action to resolve any of these issues—quickly.

In summary, if you're an ambitious business owner looking to boost your current results or if you're looking to get your business off to a flying start we invite you to  contact us today. You can expect practical business, tax, marketing and financial advice that could have a profound effect on your future business profits. To book your  FREE, one hour introductory consultation simply call us on (03) 9326 1244 or complete your details in the box at the top of this page and we will be in touch.

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