Business Failure

Why Businesses Fail

Why do businesses fail? Ironically, the main reason is that the business owners didn't take the time to learn why most businesses fail before they ventured into starting a new business. Here are common pitfalls that can lead to business failure. Your mission? Understand them and avoid them!

Small businesses fail at an alarming rate in the U.S. Every day, hundreds of small businesses close their doors because they weren't able to effectively blend the many elements needed for success.

Why Businesses Fail

Unfortunately, many of these businesses could have succeeded if they had only known how to avoid the top six pitfalls that commonly plague struggling companies.

1. Lack of planning

Successful small businesses don't just happen. They are the result of intentional and well-executed business plans. Many entrepreneurs are so eager to get started that they neglect business planning and jump in headfirst with little more than a dream and an idea. That might cut it in some arenas, but not in small business. If you have already started your business and don't have a business plan, your first priority should be to get one. Fast!

2. Inadequate funding

Another common reason for small business failure is a lack of adequate funding, especially during the critical start-up period. Inadequate funding severely limits your capacity and threatens your ability to grow beyond the initial stage of life. If you have done your homework properly, you should know how much money it will take to launch your business. Resist the urge to start until you have obtained all of the funding you know you need to do it right.

3. Bad marketing

It's possible to create a business that sells the best product at the best price and still fail because no one knows it exists. Getting the word out about your product is critical if your business is going to have any chance of becoming the thriving venture you think it can be. If you don't know anything about marketing, get help from someone who does. If all else fails, cruise the local bookstore and pick up a few resources that will help you get started.

4. Unreliable suppliers

You can't sell what you don't have. Your ability to maintain proper levels of inventory is directly proportional to the quality of your relationships with reliable suppliers. Developing effective supply channels can take a little time, but if you are having problems with your current supplier don't cross fingers and hope things will get better. Take action! Seek out new supplier relationships and make the switch as quickly as possible.

5. Staffing imbalances

Labor is the biggest expense for most small businesses. Therefore, it only makes sense that it's worth your time to make sure that your company employs the right amount of people. Too many employees and you'll be forced to carry around dead weight. Too few employees and performance will suffer. Striking the perfect balance isn't easy, but the rewards are well worth the effort.

6. Ineffective sales performance

Sales are a key element in the success of any businesses. Poor sales, on the other hand, are an indication that your business might be in jeopardy. Maintain a close eye on sales patterns and trends, and hire the best sales staff you can afford to keep the money rolling in and your company rolling on to the next level.

Share this article

Additional Resources for Entrepreneurs

Lists of Venture Capital and Private Equity Firms

Franchise Opportunities


Business Glossary


Conversation Board

We greatly appreciate any advice you can provide on this topic. Please contribute your insights on this topic so others can benefit.

  • Sadi Farooqui posted on 4/6/2009
    Sadi Farooqui
    The other causes of venture failures can be directly linked to ignoring the limits of risk taking. In every venture, entrepreneurs must be aware on the degree of risk which can grow to deplete the assets that are needed to generate the level of cash flows to keep solvent. When these assets are not securitised via third party or any low risk derivatives, a hidden risk begins to grow behind the balance sheet. This is known as "Latent Risk" which can knock out key assets during market turbulence in a collective manner. Unfortunately to measure such risk still remains a challenge for Quants and risk professionals. My firm specializes in delivering technical service in managing risk and we focus on such challenges. Sadi Farooqui, Risk-Tech Consulting, Chairman & Founder.
  • Abdirahim ibrahim posted on 8/29/2009
    Abdirahim ibrahim
    Also what causes small business failure is neglegence, when the staff of the company overlook the activities which are going on in the company, the company will easily fail.
  • McDodd posted on 12/12/2009
    I recently read a book titled "A Tale of a Business Failure" that tells the story of one company's success to failure route. Written by a professional CPA, the book offers great insights to what happened and what did not happen. After reading the list above, it seems the company moved through a progression of the six pitfalls almost like a chain-reaction. It was a good read and emphasizes all the pitfalls in painful details.
  • Yemi Akande posted on 3/18/2011
    Yemi Akande
    From my own observation drawn from a company I know, another major cause of business failure is an incomplete business goals orientation given to the employees by the business owner, coupled with poor incentives. This can grossly lead to below-expectation performance on the part of the staff; which in essence is not their making.

Leave a Reply

Questions, Comments, Tips, and Advice

Email will not be posted or shared
Code Image - Please contact webmaster if you have problems seeing this image code

Problem Viewing Image? Load New Code