Why New Businesses Fail (And How to Avoid Public Humiliation)

Approximately 32% of small businesses fail in the first two years, about 51% fail within five years, about 66% fail within 10 years, and roughly 74% fail within 15 years. Running a company is hard—we know that because we’re a small business. So when we saw that opening statistic of small business failures in Washington, we thought, “Yikes, we’ve gotta do something to address that.” 

And if that’s not enough to get you looking around nervously, here’s some even more upsetting news: according to a report from Lending Tree, Washington is the nation's top state for small business failures, with 40.8 percent of small businesses failing in the first year, compared to the national average of just over 23.2 percent.

How Do I Know if My Business is Failing? 

First, let’s try to assuage some worries. Reading the above section might have had you questioning everything you know about running a business. How do you know if you’re one of the companies on the verge of collapse? 

Here are some of the key signs to look out for:

• Lacking or having inconsistent levels of cash

• Having difficulty paying back loans on time

• Lacking the ability to pay suppliers on time 

• Dealing with multiple customers who pay late 

• Losing clients left and right

• Having an unclear or outdated business strategy.

Three of the Main Reasons Why Small Businesses Fail 

Now that we’ve got the basics out of the way, let’s dive a little deeper into some of the most common reasons small businesses struggle to see long-term success. 

1. Poor Financial Management

This likely doesn’t come as a surprise, but poor financial management is one of the most frequent culprits of closing small businesses. 

Most business owners are highly aware of how much money they need to keep their business afloat, regularly tracking the cost of payroll and rent and paying outside vendors on time. They’re also keeping track of how much revenue they’re generating. However, owners of failing companies are often less in tune with how much revenue they’re pulling in, and this disconnect may lead to failure.

Managing finances while launching a new business venture can feel nearly unachievable. Many small businesses employ outsourced financial service providers to keep them on track. But for those who aren’t ready—or are unable—to take this plunge, try to implement these tips: 

• Separate your personal and business finances—yes, that means different cards and accounts for everything. 

• Create a detailed financial budget and stick to it.

• Regularly examine the costs of your products and services to ensure you can both remain competitive AND make a profit.

2. Operating Without a Business Plan 

I’ll admit it: a good portion of starting a business is just winging it. Yes, it would be nice to know everything before going in, but we’ve all seen how that’s typically not possible. However, that doesn’t mean you should stay doing things on the fly. Many small businesses dismiss the importance of effective business planning, often to their own detriment.

Owners who neglect to create business plans are actually opening the door to a vast host of problems. Without having a solid understanding of your goals, competitors, industry, and potential challenges makes it nearly impossible to run a successful company for the long term. That’s why all small businesses need to create a business plan—even a rough one—before beginning operations. 

A strong business plan should include:

• A clear description of what your business does 

• A plan for current and future employee and management needs

• Financial needs, such as projected cash flow and budgets 

• Competitor analysis 

• A guide for marketing initiatives 

• The threats those in your industry are most likely to encounter, along with how to either avoid or solve them

3. Not Seeking Professional Advice 

Like we said before, running a business often feels like flying by the seat of your pants. Some business owners may keep trying to weather the storm alone (recall those failure stats).

Professional service providers like consultants can help with everything from creating effective marketing strategies to locating new funding sources. They have a range of experience because that’s their job—they earn a living by providing expertise to owners of businesses of all sizes.

Even if you just need someone to bounce ideas off of, a consultant will always stand in your corner and push you towards long-term success. 

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Samaria Johnson writes many things, hopefully none of which you consider boring. She loves taking complex information and breaking it down into engaging, understandable content. Samaria’s goal is to only use her words in ways that help make the world a better place.