Small Company Failure: How to Avoid the Business Graveyard

Small Company Failure: How to Avoid the Business Graveyard
Updated September 01, 2023
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Halloween is here, and there’s a reason some businesses don’t celebrate this holiday. Some say it brings bad luck for the company—and nothing is scarier in business than failing a company you’ve invested so much time, energy, and money in.

According to the Bureau of Labor Statistics, 20% of small businesses fail in their first year, 30% fail in the second year, and about 50% of small businesses fail after five years of operation. Out of the millions of businesses that start per year, how will you avoid the business graveyard?

Causes of Business Failure

There are many causes of small business failure, but these few mistakes can cause any business to fail—small or large.

Not Enough Attention to the Bottom Line

Any financial advisor will tell you that “Cash is King.” Cash flow determines whether your company will be able to operate. Without budgeting and close attention to spending, businesses will fall in the negative and entrepreneurs will lose their investment.

Insufficient Market Research

Market research involves understanding your customer, the competition, what drives the success of a product or service, potential issues that your business might encounter, and other valuable pieces of information. Market research saves companies time and resources by determining if a business’s market strategy will best serve the industry, or if they should pivot to another strategy.

Hiring the Wrong People

Losing employees can be detrimental to a business, especially in smaller businesses where people have more responsibilities. Some business owners see employees as expenses and evaluate the costs of losing an employee versus investing in quality training and team building up front. As a result, the leadership doesn’t spend enough time to carefully build the staff. Other business owners, and notably more successful ones, view employees as assets and investments, regardless of the price. 

Weak Mission Statement and Values

Every organization needs direction. Mission statements and company values may seem like a tedious step, but they create the roadmap necessary for business operations. Mission statements and company values also create a sense of authenticity among investors and customers.

Poor Customer Service

Customers are not only a source of revenue. They serve as a marketing or advertising tool, convincing new prospects to do business with you. With the increase in the importance of Yelp and Google reviews, businesses with poor customer service will find it difficult to obtain new customers and survive.

Inability to Adapt

Staying safe and comfortable might help you get past the first couple years of operation, but close-mindedness and little flexibility are what really causes the 50% to fail within the first five years. Entrepreneurs should prepare for change by staying flexible in business strategies.

Ways to Avoid Business Downfall

Prevent a business collapse with these simple tips:

Manage Cash Flow

Manage your cash flow, or the funds that enter and exit a business, by tracking reports weekly or monthly. Cash flow includes accounts receivable, accounts payable, inventory, expenses, and debts. If managing cash flow is not your strongest contribution, hire an accountant or CFO in your business (although as a business owner, you should monitor your funds consistently).

Evaluate Your Employees

Weekly meetings and quarterly reviews create a sense of inclusion for the employees by allowing them to provide input for the business. Monitoring the employee performance also benefits the employer by raising awareness in what to improve. 

Revisit Business Strategy Often

Touching base with your team every month or quarter on the next period’s strategy, or even reflecting upon this yourself, will drastically improve operations within your business. Conduct analyses such as the SWOT test (Strengths, Weaknesses, Opportunities, and Threats), revisit your business model canvas, or simply look through your numbers to create new strategies.

Include Customers in Business Operations

Value your customers by making them feel valued. Ask for feedback, make changes accordingly, and remind them constantly that you care. The customers are the fuel of the business, and they can be useful if you want to improve your online presence.

Stay Informed with the Industry

In order to stay competitive, stay informed by following industry patterns. Read articles to see what the customers or competitors are using and adopt a new strategy around that. For example, if you own a financial advising company, subscribe to Money, Bloomberg Businessweek, Fortune, etc.

Letting Go of Your Business

Certain external causes of business failure are not preventable or predictable. Before you fall further into debt, evaluate your finances to see if it is worth continuing business operations. A few examples are:

  • Loss (either a business partner or in your personal life)

  • An invention that removes a need for your product or service

  • Government regulation

  • Natural disasters

Aside from the events that are out of your control, keep your business alive by preparing for any scenario by staying in tune with the business—internally and externally.  

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Originally published on October 26, 2022, and last edited on September 01, 2023.

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