Why do small businesses fail?

Small businesses serve as the lifeblood of countless communities, offering employment opportunities and fostering economic stability; for instance, according to MYOB, small and micro businesses make up over 97 per cent of all firms in New Zealand.

However, not all small businesses manage to endure in the long haul. Many falter within the initial five years due to a variety of factors.

1. Cashflow and Bad Debt Issues:

One of the most prevalent causes of small business failure lies in cash flow problems. Owners must pay more attention to the discrepancy between cash and invoicing, particularly during the startup phase. Insufficient cash reserves and mounting bad debt can hinder a company's ability to meet financial obligations and pay employees. To safeguard against cash shortages, owners should establish adequate cash reserves and implement clear payment terms, including late fees.

2. Failure to Delegate:

Another common pitfall is the reluctance to delegate tasks and responsibilities to capable employees or contractors. Many business owners attempt to shoulder an excessive workload themselves, neglecting to trust their staff with specific responsibilities. This not only places undue stress on the owner but also limits the business's growth potential. Owners should strive to work on the business rather than in it, entrusting competent individuals to handle various tasks.

3. Insufficient Training

A lack of proper training represents a third factor contributing to small business failure. Owners must ensure that all staff, including themselves, receive comprehensive training for their respective roles. Regular check-ins and performance reviews should ensure employees remain up-to-date with the latest skills and techniques.

4. Wrong Personality Type

Some business owners possess personality traits that may hinder their ability to run a business effectively. For instance, an owner may excel in sales but need help with business operations, or vice versa. To address this imbalance, potential business owners should consider taking a personality test, such as the Myers-Briggs test, before embarking on their entrepreneurial journey. Identifying areas that require additional support can help prevent potential pitfalls. Additionally, seeking guidance from an experienced business mentor can prove invaluable in determining skill and trait gaps.

5. Lack of Market Understanding

Lastly, a failure to comprehend the target market or customer base represents a fifth reason small businesses stumble. Any company must deeply understand their customers, their needs and desires, and the most effective means of reaching them. This insight helps a small business market itself and effectively stand out from the competition.

In conclusion, small businesses play a vital role in communities by generating employment opportunities and fostering economic stability. However, not all small companies manage to thrive due to various reasons. The most common causes of failure include:

• Cashflow or bad debt issues.
• A failure to delegate tasks.
• Need for employee training.
• Wrong personality type.
• A lack of market understanding.

By proactively addressing these challenges, small businesses can enhance their chances of long-term success.