Five Reasons that Small Businesses Fail

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If you are thinking of starting a business, there is a 50% chance that it will fail and what’s worse, the reasons for this are hard to pin down. All of us have an understanding of human nature. Most people, in an effort to retain dignity in a difficult situation, deny that the reasons for failure largely rely on themselves. Instead, they blame banks, government, and other people who were a part of the business.

Jay Goltz, writer for the New York Times and owner of five small businesses, went to the other side of the business. He spoke to past customers and put together a list based on their responses.

Economy of Scale

Businesses start with a lot of hope and one of those hopes is that a newly formed small business can compete with big box stores already established in the community. Those business owners sometimes think that they have an edge on the impersonal large stores. The reality is that small businesses face a daunting task trying to compete with bigger stores with lower prices. To avoid this error, find a location where your business doesn’t have large scale competition.

Poor Accounting

Entrepreneurs must have many more skills than just the primary function of their business. The owner of a shoe business has to be a skilled bookkeeper and account or they may not notice financial leaks in the business. How many businesses fail because the owner didn’t have the skills necessary to keep detailed records of their business? If you don’t have accounting skills, hire somebody who does. It is vitally important that your new business keep their detailed financial records.

Lack of Cash Cushion

This isn’t only a small business failure. Businesses of all sizes find themselves bankrupt due to this problem. The Great Recession of 2009 proved that business is cyclical. For every period of great gain will come a period of challenging times and that’s when the cash you have in savings becomes the revenue stream for your business. If you don’t have it, you, like many others, may not survive the worst of economic times.


No business owner wants to believe that they failed because they don’t have what it takes to be successful but sometimes that’s the only explanation. Not everybody can be above average and for that reason, the only way to overcome this is to surround yourself with people who can make up for your shortfalls.

Lack of Management

A business owner must also be a good manager. Getting the best out of people is a skill that few possess at the highest level but those who do are able to create a business environment that allows for a thriving business. Along with that, you must have a vision for where the business is going.

Bottom Line

If you know how many businesses fail, you can avoid those errors in your own startup. Like anything else you’ve endeavored to do successfully, education is your strongest ally.