The Top 25 Causes of Small Business Failure

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6 pitfalsOne of the big advantages a CPA has working with small business owners is that we get to learn what makes them profitable and what makes them fail – without losing any of our own funds. On top of that, we too are business owners who face many of the same kinds of opportunities and challenges that all small business owners face.

So what have I learned? Well for starters, launching a small business is risky and the chances of building a successful business are small. According to the Small Business Administration (SBA), over 50% of small businesses fail in the first year and 95% are out of business in the first five years. Of the ones that survive past five years, less than 1% reach a level that allows the business to survive the retirement or death of the founder.

The following are the top 25 reasons I have seen for small business failure:

  1. Choosing a business in an industry that just isn’t very profitable.
  2. Not having actual hands-on experience in the industry before opening the new business.
  3. Unwillingness by the owner to take responsibility for everything that is not working in their business.
  4. Poor management skills by the owner.
  5. Lack of necessary effort by the owner. They often don’t understand that they are not in a 9-5 job anymore.
  6. Unwillingness of the owner to be a continuous, lifetime learner.
  7. Failure to have a business and marketing plan.
  8. Inadequate cash reserves.
  9. Failure to truly understand their customers' wants and needs. This also includes not understanding what triggers a customer to buy.
  10. Lack of marketing and sales skills.
  11. Failing to price your product or service correctly.
  12. Failure to anticipate or react to changes in the marketplace, competition, or technology.
  13. An overdependence on a single (or a few) customers.
  14. Uncontrolled growth.
  15. The owner believing they can do everything themselves.
  16. Poor customer service.
  17. Unqualified or untrained employees.
  18. Failure to seek outside professional help.
  19. Employee fraud.
  20. Poor location.
  21. Poor inventory management.
  22. Poor credit arrangements.
  23. Absence of performance monitoring.
  24. Over borrowing.
  25. Failing to innovate and introduce new products or services.

A review of the list shows that the key reason for business failure is the inexperience and lack of business knowledge by the owner.