Why So Many Businesses Fail (and What to Do about It)

According to the Small Business Administration, 20% of small businesses fail in the first year, 50% fail within five years, and only 33% make it to 10 years or longer. Although businesses fail for various reasons, here are three common reasons why so many businesses fail (and how to avoid them).

It Takes Money to Make Money

Starting a business can be costly. There can be licensing fees, registration fees, marketing fees and inventory fees that need to be paid all before you even see your first buck. Many people start by financing their own business. When they run into some unforeseen expenses, they whittle away what little they have left in the bank. As a business owner, you should make sure you have about six months’ worth of expenses saved away to ride out any rough spots until you start seeing profits.

You’re Competing with Everyone (Including the “Big Guys”)

Business can be cutthroat. If you get too successful, other companies will be coming for you. Smaller companies may copy you, and the more prominent companies may undercut you. Big companies may just start a company similar to yours, and give the product away at a loss or absolutely free just to put you out of business. That’s the story of what happened to Google Video, diapers.com and Rhapsody, among others.

What’s even worse is that the big guys don’t have to make money. Retailers like Walmart can cut their prices and still make plenty of profit. They may even sell the product for less than what it cost them to buy it from the distributor. If you cut prices to try to keep up, that can take up all your profit margin, and you go out of business after a brief period. They can crush your company and leave you bankrupt before you even know what hit you.

If you’re a small business, it’s best to not try to compete directly with the big guys but instead focus on whatever competitive advantage you have. It could be fantastic customer service, personalized care or even superior product quality. For example, McDonald’s may sell the most burgers. Still, the local burger joint that sells juicy burgers with exceptional service can undoubtedly hold its own next to them.

Running a Business Takes More than Having a Great Product

I remember buying some fantastic cookies from a small local vendor who made all their products in-house. I went every couple of weeks. Then, one day I had a cookie craving, and the company was gone — vanished. I was forced to go to a chain brand to satisfy my cookie craving.

A couple of years later, I ran into that local vendor at a farmer’s market. I expressed how much I loved the cookies and inquired about what happened to his storefront. He explained that although he’s good at making cookies and loves it, the business side didn’t work out because he just could not keep up with the paperwork. The last straw was when he received a huge tax bill for not paying state and local taxes; he went to his local business center to see if he could get some help. They made him fill out forms, and the assistant was not helpful. A few months later, the government threatened to levy his home for not filing appropriate documents. He was shocked. He quickly hired someone to file the papers and shut down his business. He said he didn’t need that kind of stress.

Many would argue that he could have just hired a proper accountant, bookkeeper and business manager. Still, he was barely making ends meet with his cookies — the margins were tiny — so he didn’t feel it was worth it. Sadly, this is a far too familiar story, where people who are great at making a product cannot keep up with the business side. There are some places you can go lean on and some areas you cannot; government filings and taxes are definitely not one of former.

Just because it may seem like the deck may be stacked against you doesn’t mean you shouldn’t try. Entrepreneurs get incredible satisfaction from running their own businesses. There are so many advantages, from being your own boss to making sure things are done exactly the way you want them. To make sure you avoid these common mistakes, make sure you have enough funds to last, focus on your own competitive advantage to stand out from the competition and don’t skimp on government filings and taxes.

Jennifer Charles, Ph.D., is the inventor of the Boosting Healthy Habits app and owner of Building Block Resolutions. Her company uses applied Behavior Analysis to provide therapy for children with autism, parent coaching for families, and crisis management training for employees.