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Here Are 7 Reasons Why Small Businesses Fail Research Team | Posted On Friday, January 17,2020, 03:49 PM

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Here Are 7 Reasons Why Small Businesses Fail



With the addition of nearly 1300 start-ups in the previous year, India retains its position as the 3rd largest start-up ecosystem in the world. With a suitable environment for start-ups and small businesses to grow, putting a new business idea into action is no longer the preserve of a few select families. With start-ups like Flipkart, OYO, PayTm, Zomato having proved their mettle, the Indian businesses have become a favourite investment spot for global investors. However, most often small businesses and start-up start fail in their initial year of operations. About half of them succumb to business failure within 5 years.  It has often been noted that most of these businesses fail due to some common mistakes they make.

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Here Are 7 Reasons Why Small Businesses Fail

Here are some of the major reasons why small businesses fail and here what you can do to avoid them:

Improper Business Planning:

One of the most common reasons why a small company fail is lack of proper planning. Most often entrepreneurs, in the quest to achieve their dreams of financial independence fail to incorporate or create strategic plans for their businesses. Small businesses must constantly create strategies based on factors like workforce needs, analysis of competitors, changes in the market and economy, innovation, marketing budgets and expenses forecasts.

See Also: Startup Business Loans in India

People who are in charge of business management know the importance of methodical and strategic planning. A business plan, however, should be based on accurate information and includes:

  • Description of business and its vision
  • Market analysis
  • Workforce requirements
  • Potential problems and solutions
  • Financial list: balance sheet, income statement and cash flow analysis
  • Promotional activities and analysis of competition
  • Budgeting and managing business growth

Missing Innovation and Business Model:

Most often businesses shut down due to lack of proper business models or due to traditional ways of operating. When entrepreneurs try to build a business on a model that is not reliable or when a business operates on outdated business ideas then such an enterprise lacks stability and innovation. The business idea may be good, but the lack of innovative techniques or improper implementation of the idea may lead to its failure.

See Also: Why Loan is Important for Business?

Low Working Capital:

Lack of capital is an alarming sign. While planning for a business, you must ensure the business has a constant flow of capital to keep it alive for a long-term. Lack of capital can make it difficult for businesses to expand and may also hinder their day-to-day operations. New business owners often don’t realise the importance of working capital and lack a back-up plan for their business capital requirements.

As a result, businesses often fail or shut down before realising their full potential. Also, unrealistic approach likes miscalculation of incoming revenues from sales may be another cause of business failure. To keep your business running you must ascertain the amount of capital your business requires. You must also consider factors such as the cost of staying in the business and the type of business you are in. Some business takes a year or two to fetch good returns. Arrange sufficient business capital to sustain your business within this period.

Unable to Expand:

Sometimes business owners are unable to expand their business and this can be attributed to various factors like lack of online expansion of business, lack of capital or lack of efficient marketing of the product.

See Also: Top 5 Government Loan Schemes for Small Business

If you brand yourself well you can grow exponentially even without spending huge bucks. Nowadays the presence of social networking sites helps businesses grow and establish their presence by spending too little. Most of the small businesses nowadays operate online from traditional offline marketing. Put a little extra effort now and expand online and you can reap the benefits for years to come.

Lack of Talented Manpower:

Any business today requires a tribe of dedicated and talented manpower. This is often overlooked and lack of employee benefits often leads an organization to lose talented employees thus leading to its failure. As such a group of devoted and talented employees is essential for the sustainable growth of the business. Even a small group of individuals with good skills and innovative ideas can help you achieve your business targets. Thus pooling and retaining talented employees can help you stabilize your business in the long-run.  

See Also: Business Loan Interest Rates, Calculations And Eligibility

Poor Financial Management:

Many reports on business failure cite poor financial management as one of the primary reasons for failure. New business owners often lack expertise in managing their finances well like keeping financial records, records of purchase of raw materials, accounts payable and accounts receivables etc. if business owners do not recognise these problems then the enterprise may soon go out of business.

See Also: Get Business Loans Instantly

With the advent of professional business apps, you don’t have to go out and seek expert financial management. These apps are useful for start-ups and small businesses and help you to streamline your business finances while on the go. With the help of financial apps like Gusto and QuickBooks you can create invoices, manage the company’s payroll, file for taxes, and automates deductions and manage suppliers, customers, and expenses easily. However, if your organisation has grown or if you are not good with numbers you can always hire a professional to manage your company’s finances.

See Also: How To Get A Business Loan From A Bank?

Unable to Attract Customers:

Your tribe of loyal customers can keep you in business. Your business may fail if you neglect the feedback offered by your customers. Not all businesses operate on customer feedback, however, some businesses like the services sector and business dealing with products like cosmetics or electronics products heavily depend on the customer’s feedback of the product.

Sometimes customers like the product or service but they would love it better if a feature or two is changed. However, if you are not listening to your customers, you will eventually lose them and thus you will no longer be able to attract them to buy your product.

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