Updated: Oct 2
Small businesses are the backbone of the American economy. However, according to a study by the Kauffman Foundation, about two-thirds of them will fail within their first five years.
So what are the most common reasons for small business failure? In this blog post, we will take a look at some of the most common reasons and offer advice on how to avoid them.
A lack of a solid business plan
One of the most common reasons for small business failure is a lack of planning and poor management. This includes not having a solid business plan or failing to update your plan as your business grows. A business plan should include information on your target market, your product or service, how you will make money, and your marketing strategy.
Another common reason for small business failure is a lack of capital. This includes not having enough money to cover expenses, not having the right funding in place, and not investing in your business.
Without sufficient capital, your business will not be able to grow, which will eventually lead to its failure.
Incorrect business model
A third common reason for small business failure is an incorrect business model. This includes choosing the wrong pricing strategy, not targeting the right market, and offering a product or service that no one wants or needs. Finding your target audience is a key to finding potential customers.
The best way to overcome this is to do proper market research before starting your business and to make sure that you are targeting a market that is willing to pay for your product or service.
Unstable cash flow
For most small businesses, cash flow is king. And if you cannot keep your cash flow stable, your business will not be able to grow, which will eventually lead to its failure.
One of the main reasons for unstable cash flow is that small businesses often do not have a solid credit history. This makes it difficult to get financing from banks and other lending institutions.
Another reason is that small businesses tend to have a lot of fixed expenses, such as rent, employee salaries, and marketing costs. When sales are low, it can be difficult to cover these costs.
Lack of experience
One of the main reasons small businesses fail is because the owners do not have enough experience in running a business. They may know how to make a product or provide a service, but they do not know how to manage the finances, hire and fire employees, and deal with legal issues.
Small businesses often fail because they do not have a good marketing strategy. They may not have enough money to invest in marketing, or they may not know how to reach their target market.
Without effective marketing, it is very difficult for a small business to succeed because they cannot connect with their target market.
Failing to research your industry and competition is another common mistake made by small businesses. This includes not knowing what trends are happening in your industry, what your competitors are doing, and how to differentiate yourself from them.
Insufficient accounting support
Not hiring a CPA early on can also lead to small business failure. When it comes time to file taxes, you may not be aware of all the deductions available to you or you may not have the time to do it yourself.
When it comes to when to hire a CPA, sooner is normally better. Not waiting until the last minute will help ensure your small business is on track for success. Having an effective CPA in place right from the beginning can help you to avoid costly mistakes and ensure your business is compliant with all tax regulations.
Another key reason small businesses fail is a lack of effective tax planning. When you don't have a plan in place, it can be difficult to make informed decisions about where to allocate your resources. This can lead to missed opportunities and even penalties from the IRS.
This is another situation where having a CPA onside can save you money in the long run by helping you to take advantage of tax breaks and deductions.
Bookkeeping and Financial Reporting
In order to make informed decisions, you also need accurate financial information. This can be difficult to achieve if your bookkeeping and financial reporting is not up to par. When finances are not properly tracked and organized, it can be very difficult to understand where your business stands financially. This can lead to cash flow problems and even bankruptcy.
Hiring a CPA increases the chance of your business surviving
Hiring a CPA can help to ensure that your financial reporting is accurate and up-to-date, allowing you to make sound business decisions.
When it comes to small businesses, failure is often due to a lack of planning and organization. By ensuring that you have the proper tools in place, such as a CPA, you can increase your chances of success.
MyAccountingCrew.com offers a wide range of services for small businesses, including bookkeeping, tax preparation, and more.1
Contact us today to learn how we can help your business succeed!