4 Reasons Businesses Fail — and How You Can Avoid This Fate

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

Many small businesses have to close their doors within the first five years. Here are some common reasons companies fail, and tips on how to avoid that happening to you. 

Starting a business can do wonders for your finances, if you are successful. Unfortunately, many small businesses fail. In fact, 20% fail in the first two years; 30% by year three; and 50% by year five, according to Forbes.

There are many reasons why these companies cannot find success, but here are some of the top reasons why businesses don’t end up making it — along with some tips on how to avoid these problems in your own business venture.

1. A lack of market demand

Companies need customers to survive. Without people to buy products or services, a business cannot make any money to fund its business checking account. That’s why it shouldn’t come as a surprise that about half of all companies that fail in the first five years do so because there’s not enough demand for their products or services.

To avoid this, it’s important to do market research before opening a business. Consider who your target customers are going to be, how you can meet their needs in a way competitors can’t, and how you will market to them so they know you are available. Only by doing a significant amount of research into your target market can you determine if there’s enough demand to open your doors.

2. Running out of money

Running short of funds is another common reason for companies to fail, accounting for about 38% of business failures. The problem is, it can take some time for your business to actually start turning a profit. If you do not have enough money coming in, you won’t be able to keep your doors open long enough to actually turn the business into a success.

To avoid this, have a plan for how to fund your business for at least the first year or two even if you don’t start making a lot of money right away. Try to keep your initial overhead costs as low as possible and avoid committing to any large expenses until you start seeing money coming in consistently.

If you can start small and grow your business over time on a shoestring budget, you’re less likely to have to close your doors since you simply can’t keep things going any more.

3. Unsuccessful marketing

If you cannot reach your target audience and convince them to try your product or service, you aren’t going to be successful no matter how great your offerings are. Unfortunately, many companies fail because of unsuccessful marketing efforts.

To make sure this doesn’t happen to you, do some research into who your customer base is and what your competitors are doing. Look at what marketing tactics have worked for others in your industry and develop a detailed, comprehensive marketing plan.

Your marketing plan should include things like a description of your target audience, different strategies you’ll use to reach them such as social media networking, internet marketing, word-of-mouth referrals, blogging, TV or newspaper ads, reaching out to local organizations, or taking another approach you’ve developed.

You should also set a marketing budget, figure out where to allocate your dollars, and define a system for tracking the performance of different marketing efforts to see what pays off for you.

4. Inadequate management

Finally, inadequate management can be a big reason for business failure. That’s because not everyone with a great idea actually knows how to run a business.

Running a company doesn’t just mean selling products or services. You’ll also have to be good at budgeting, marketing, accounting, managing employees, and a whole host of other tasks that may not directly be related to what you’re selling. Consider taking some business courses to learn these skills before getting started, or put together a team of experts who can help with the things you don’t know.

Ideally, by following some of these tips, you can avoid falling victim to these common reasons for business failure and your company will end up a great success. Remember, while many businesses fail, a great many also succeed and go on to change their owner’s lives — and perhaps even to change the world for their customers.

Alert: highest cash back card we’ve seen now has 0% intro APR until nearly 2025

If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee.

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More