Top 3 reasons why small businesses fail and how to avoid them

Starting a small business takes patience, perseverance and a lot of hard work. It’s not easy to launch a new venture: Data from the U.S. Bureau of Labor Statistics shows nearly half of all startups fail within the first five years.

There are some common reasons why small businesses fail. Understanding the obstacles other business owners have faced can help you prepare to navigate these specific challenges. Below are the top three reasons why small businesses go under and tips on how you can avoid the same fate.

Challenge 1: Cash flow problems

According to SCORE, 82% of small businesses fail due to cash flow problems. Cash flow is a blanket term with many underlying roots. Cash flow is simply a metric indicating how money is coming in and being spent at your business. Cash flow issues can result from a lack of funding, poor budgeting, or inventory management issues, among other things.

There are a few ways to mitigate this risk, although it’s worth reiterating negative cash flow is often an indicator of a different issue. First, avoid big expenses in your first year of business.

“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,” wrote SCORE. “When in doubt, stay conservative. The ‘lean and mean’ startup headset – and the concept of a minimum viable budget – is your friend.”

A lean operating budget is a good starting point, but it isn’t the only way to manage your cash flow. Spend time tracking your inventory, building cash reserves and making sure your accounting is running smoothly. Many experts recommend working with a certified public accountant during the first few years after your business has launched to ensure your accounts receivable/accounts payable systems are working well and you have enough set aside for taxes.

The other side of cash flow is revenue, or financing, for new businesses. Many small business owners struggle to find loans, grants, or investors to fund their ventures. Look for unique funding opportunities for small businesses, such as government loans, business diversity grants, or industry-specific grants.

Challenge 2: There’s no demand for your product or service

Just over 40% of small businesses fail because there’s an insufficient need for their product or service. When there’s no demand for what you’re selling, the best marketing campaign in the world won’t turn around your business results.

Avoid this risk by doing the right market research before launch. This exercise should form a key part of your business plan. The National Federation of Independent Business reports companies with a business plan have the best chance of success – particularly if they identify their potential markets, define their ideal customer and analyze their competition.

Many good, affordable resources can help you estimate the demand for your product or service. Try Google Trends, a free tool that can show you how often people are searching for keywords related to your product or service. Surveys and focus groups can also help you get feedback on a minimum viable product during your development process.

Challenge 3: Poor management

As the creator and founder of the business, it can be tempting to hold tight to the reins as your venture gets off the ground. Unfortunately, attempting to do everything yourself is neither sustainable nor helpful for the longevity of your business.

“While the owner may have the skills necessary to create and sell a viable product or service, they often lack the attributes of a strong manager and don’t have the time to successfully oversee other employees,” wrote Investopedia. “Without a dedicated management team, a business owner has greater potential to mismanage certain aspects of the business, whether it be finances, hiring or marketing.”

Your budget may not allow you to hire a full senior leadership team but look for ways to delegate key roles effectively. That might involve bringing in a fractional CFO, hiring a mid-level manager, bringing on a virtual assistant or outsourcing key tasks to a partner.