The #1 Reason Small Businesses Fail - And How to Avoid It (2024)

Cash flow.

Mention those two little words to almost any small business owner, and you’ll see them flinch.

Very few business terms get as cool a response. And sadly, those two little words (both of them four-letter words, interestingly enough), are the #1 reason small businesses fail. They take out more small businesses than any other factor.

82% of small businesses fail due to cash flow problems.

The #1 Reason Small Businesses Fail - And How to Avoid It (1)

And while most small business owners agree cash flow is the #1 risk for small businesses, cash flow is also a blanket term – a symptom, if you will – of several underlying causes.

When you look at those underlying causes, you can better see how to solve the cash flow symptom.

1. Develop a minimum viable budget.

Or, in other words, stay cheap.

Here’s what I mean: As your business launches and grows, there will be a push and pull between funding and supporting that growth, and being conservative with your spending.When in doubt, stay conservative. The “lean and mean” startup headset – and the concept of a minimum viable budget - is your friend.

You need a lean operating budget that can get through hard times. And you must expect and prepare for those hard times. Do not think that your business will be the sunny exception that never has trouble.

That’s the trick with a lot of budgeting – to continue to be careful with your money even when times are good.Actually, you have to save money and stay frugal when times are good. Because if you can’t save then, in the good times, it’s unlikely you’ll do it when business gets tough.

2. Protect your credit.

Have you ever seen a business start to slowly fall apart?

Often, the first sign of trouble is that they start delaying payment on their bills. Or they’ll change their payment terms from 30-day net to 90-day net.The move doesn’t fool anyone. Even interns know what it means when a company delays paying its bills.

In the next phase after delaying payments, a company will start playing the game of “who can we not pay for as long as possible”. It’s risky because eventually the business makes a mistake and their credit gets dinged. Or one vendor gets fed up enough to finally call a collection agency, or to stop service.

Once that’s happened, it’s often too late.

As the saying goes, “you can only get a loan when it looks like you don’t need one.” Once you’ve shown signs of being financially strained, your loan options dwindle dramatically. And even if you can get a loan, the terms will be far less attractive.

3. Manage your inventory like it was your biggest, most expensive business asset.

Because that’s exactly what it is.

Poor inventory causes a slew of expensive problems that can directly impact cash flow. They include:

  • Ordering new items you don’t actually need, simply because you couldn’t find them.
  • Expired items that should have been sold (even at a discount) before they became worthless.
  • Unfulfilled ordered based on inventory demands you could have predicted.
  • Extra costs accrued by having to fill those backorders.
  • Disappointed customers who have to wait for backorders to be filled.
  • Wasted employee hours spent looking for lost inventory, placing rush orders, managing back orders.
  • The steep cost of paying for more inventory space than you would actually need – if your inventory was properly managed.

This list goes on, but I think you get the idea. This is an expensive problem that’s surprisingly widespread. 43% of small businesses do not track their inventory or use a manual process. And 55% of small businesses do not track their assets or use a manual process.

4. Have cash reserves.

If your business slowed down for three months, could you manage the downturn financially?What about six months? A year? More than a year?

It’s not a fun exercise, but you might want to talk with your accountant about how well-positioned you are for an extended period of a soft economy. You never know – the news might be better than you think. Maybe you are well-positioned to get through a bad spell.

But if you’re not, you’re still lucky. You’ve got time to get ready. It might be worthwhile to slow down your company’s growth if only by a little, to make sure you’ve got cash reserves to manage everything if business conditions changed.

Again – this isn’t a fun conversation to have, and it could mean you have to do a little bit of belt-tightening. But it’s a far easier conversation than have to tell employees they’re out of a job.

5. Get yourself a great accountant (or CPA).

Problems with cash flow rarely come out of nowhere. They usually accumulate over time, in one form or another, while the business owner is busy with any number of other projects and responsibilities.

That’s why having a great accountant or a CPA can be so helpful. If you’ve got a smart, proactive financial professional who’s really looking at your company’s finances with rigor and insight, you’ve got a fantastic insurance policy against cash flow problems (and many other financial woes).

Unfortunately, that same quality of a great accountant – being proactive – is also the #1 quality business owners say their accountant lacks.Almost half of all small business owners, regardless of the size of their business, say their accountant is “more reactive than proactive.”

On the positive side, though, about half of small business owners don’t have this problem. They do have a proactive financial partner.Be like those business owners. It might just save your business.

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Conclusion

Cash flow problems are almost like death and taxes. You’re never going to escape them. But it is possible to manage cash flow. And you can definitely tame it to a point where it doesn’t threaten your business.

Who knows… maybe you’ll even be among the happy group of small business owners who don’t frown or shrug when people mention these two little four-letter words.

The #1 Reason Small Businesses Fail - And How to Avoid It (2024)

FAQs

The #1 Reason Small Businesses Fail - And How to Avoid It? ›

Poor cash flow.

What is the #1 reason small businesses fail? ›

Financial mismanagement and lack of budgeting are pivotal reasons small businesses, particularly in retail, face failure. Effective cash flow management is crucial. Without it, businesses may struggle to cover essential expenses like rent, inventory and salaries.

Why 90% of small businesses fail? ›

Key Takeaways. According to business owners, reasons for failure include money running out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an expert in the industry. Ways to avoid failing include setting goals, accurate research, loving the work, and not quitting.

How can small businesses avoid failure? ›

Manage your cash flow

It probably comes as no surprise that without consistent cash flow, businesses will eventually dry up and end up failing. Create a cash flow forecast so you have insight into what's coming in and what's going out.

What is the number one thing that will cause a business to fail? ›

Surveys of business owners suggest that poor market research, ineffective marketing, and not being an expert in the target industry were common pitfalls. Bad partnerships and insufficient capital are also big reasons why new companies fail.

Why do small businesses succeed? ›

A key component in why a small business will succeed is its leadership and their vision. A well-defined vision is a skill or gift that every company leader needs in order to cross the finish line. It will be the major force behind an entrepreneur's success and will serve as a compass in tough times.

What business has the highest failure rate? ›

What industry has the highest failure rate? The industries with the highest failure rates are the construction, transportation, and warehousing industries where 30%-40% of businesses fail within their fifth year.

Why do 80% of businesses fail? ›

To put things into perspective, more than 80% of business failures are due to a lack of cash, 20% of small businesses fail within a year, and half fail within five years. But it doesn't have to be that way. In fact, many businesses can avoid cash flow problems with proper cash flow forecasting.

What is the survival rate of small businesses? ›

What we know about the failure rate of small businesses. According to data from the Bureau of Labor Statistics, as reported by Fundera, approximately 20 percent of small businesses fail within the first year. By the end of the second year, 30 percent of businesses will have failed.

How do I revive a dying business? ›

Here are the Five Essential Tips to Revive Your Failing Business;
  1. Conduct a Thorough Business Analysis.
  2. Develop a Clear and Realistic Business Plan.
  3. Strengthen Financial Management.
  4. Enhance Marketing Efforts.
  5. Embrace Innovation and Adaptability.

How do you save a dying small business? ›

7 tips for turning around a failing business
  1. Mindset, a positive attitude. ...
  2. Planning is essential. ...
  3. Money management. ...
  4. Look for a Business Partner. ...
  5. Profit often Means Fewer Clients. ...
  6. Staff Make a Difference. ...
  7. Customers Matter. ...
  8. Be Open to New Ideas.
May 2, 2023

Are small businesses struggling in 2024? ›

Small business economic outlook

The just-released 2024 Bank of America Business Owner Report reveals that 65% of small business owners expect their revenues to grow this year, and 55% report they made more money in 2023 than in 2022—a positive trajectory.

Why do 70% of businesses fail? ›

This lack of adaptability, innovation and marketing will almost always result in failure. Let's face it, business owners can easily become complaisant and are often married to their original idea that they founded their business on. People don't like change, especially seasoned entrepreneurs.

What is the single most common mistake that leads to failure in business? ›

The most common reasons small businesses fail include a lack of capital or funding, retaining an inadequate management team, a faulty infrastructure or business model, and unsuccessful marketing initiatives.

What business is most likely to succeed? ›

While there are no guarantees of success, here are five types of small businesses with a history of doing better than most.
  • Agriculture, forestry, fishing, and hunting. ...
  • Cleaning services. ...
  • Business consulting. ...
  • IT support and repair. ...
  • Online course instructor. ...
  • Tips for success.
Mar 6, 2023

Why do small businesses fail quizlet? ›

The three main causes of small-business failure are management shortcomings, inadequate financing, and difficulty complying with government regulations.

What of small businesses will fail in the first five years? ›

According to research from the Bureau of Statistics, 20% of businesses fail in their first year in the United States. This percentage doubles up in their second year and over 50% of businesses fail in their first five years.

What are the principal reasons for the high failure rate among small businesses? ›

WHY BUSINESSES FAIL
  • Not having an effective business plan. ...
  • Not putting the customer first. ...
  • Not hiring the right people. ...
  • Lack of flexibility. ...
  • Lack of innovation. ...
  • Not understanding your industry. ...
  • The wrong mindset. ...
  • Ineffective marketing strategies.

Why do many small business owners fall short in their record keeping? ›

Knowledge and Expertise Gap: Small business owners often lack the necessary accounting knowledge and experience to effectively manage their finances. This deficiency can lead to errors in financial records, misunderstandings of financial statements, and ill-informed decisions.

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