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4 Reasons Small Businesses Fail


By Brian Sutter, Director of Marketing, Wasp Barcode Technologies

accounting spreadsheet

Most entrepreneurs start a new business with dreams of success, but the unfortunate fact is that too many of them fail. The U.S. Census Bureau showed the reality in hard terms – 400,000 small businesses opened and 470,000 SMBs closed their doors  just last year.

What separates new businesses that flourish from those that close in disappointment?  In many cases, the difference between failure and success is as simple as doing the following: setting manageable goals, planning for growth, investing in the right business tools, and understanding the common pitfalls that sink other businesses.

Here are four of the top reasons small businesses fail within the first year:

1. Money.

An amazing idea or product just isn’t enough to start a small business anymore. Without sufficient funds, opening doors to customers is impossible, and many small business owners underestimate the amount of money it takes. Visit the startup cost calculator to put the amount of capital a small business needs into perspective.

There are four main reasons small businesses seek financing: startup costs, inventory purchases, business expansion, or business fortification. Fortunately, in 2015, loans to small businesses are expected to increase; great news for small businesses searching for capital. If you need money, one of the best resources available is the U.S. Small Business Administration. The SBA has a variety of loan programs and offers considerable resources to small business startups. A non-traditional lender is another option; many small businesses are borrowing from on-line lenders like On Deck Capital Inc., LendingClub Inc., and Kabbage for working capital.

2. Systems & Processes.

Although creating processes and procedures isn’t sexy, being inconsistent in how products and services are managed leaves SMBs vulnerable to customer disappointment. When looking at small businesses who’ve failed, many didn’t implement the following:

  1. Inventory Management System – Small businesses need to think of their inventory as cash sitting on shelves. If piles of money were sitting in a warehouse, wouldn’t you want a system to track it? Additionally, poor inventory management eats up capital, and according to the 2015 State of Small Business Report, 46% of SMBs with 11-500 employees currently do not track inventory or are using a manual process.
  2. Customer Relationship Management (CRM) System – Forming and building relationships with customers is critical to the success of any small business. Without a tool to help SMBs stay organized and maximize each opportunity, that business’ long-term success is jeopardized. CRM software uses analytics and reporting tools to keep small business leaders knowledgeable about their customers; unfortunately, only 29% of small businesses currently use a CRM system. Don Powers, owner of Powers Scanning stated, “I immediately saw an increase in sales after investing in my CRM system, which also allowed me to focus on recurring revenue.”
  1. Poor Accounting Process46% of small business owners reported they do not work with an accountant. In fact, the assumption of many owners is that just hiring an accounting firm during tax season is enough. This couldn’t be farther from the truth. Not only do small businesses run the risk of owing more than anticipated in taxes, but they risk losing profits. In 2014, nearly a quarter of small business owners said they had lost track of whether a customer had actually paid them.

3. Marketing.

Successful businesses market their products and services, but many small business owners aren’t taking advantage of easy-to-use, modern technology and marketing approaches. The national average for marketing budgets is 10.2%, yet, 56% of small businesses invest only 3% or less in marketing.

According to Joel Harvey, Managing Partner of Conversion Sciences, “Small businesses can’t compete with big company marketing budgets, but small businesses can be highly efficient by investing in data-driven marketing. Analytics, testing, live chat, and reviews are all sources of insight small businesses can leverage over their larger competitors.”

4. Evolution.

A small business’ initial success doesn’t mean continued success. Failing to monitor industry trends and evolve means being left behind. History is full of examples of large market leaders who did not evolve and are now either much smaller or out of business (i.e. Blockbuster, Kodak). Study how other successful businesses thrive and incorporate the best of what you find into your business. Staying ahead of market trends will help secure your longevity and be your opportunity to beat the competition.

Learn from the failure of others.

When small businesses first develop a business plan, failing is not the desired end result. How do small businesses avoid failure? One way is to learn from the mistakes of small businesses that have failed. Every unsuccessful business closed for a reason: money, poor practices, high overhead, or ineffective marketing are just a few of the reasons. Take the time to research this invaluable data because it may hold the key to your success. Protect your business from the devastation of closed doors by learning why other others failed.



Brain Sutter serves as Wasp Barcode Technologies’ director of marketing, where he sets the strategic direction and oversees the tactical execution of the company’s marketing programs.