Four Reasons Why SMBs Go Bankrupt

Last Updated on June 16, 2023

There are many causes of business failure — and not everyone is willing to risk that; they don’t have the entrepreneurial spirit. Some opt to play it safe by staying at their comfortable and secure 9-5 jobs. While it’s true that the willingness to fail and take risks is the first step towards entrepreneurship, just having it is not enough; many components come into the picture to run a successful small business. If one of these is missing, the business will ultimately fail. 

The allure of starting one’s own business is enticing; one may imagine themselves as the next Steve Jobs. However, doing so is risky, as evidenced by a survey from the Small Business Administration that found 20% of small businesses fail in the first year, 50% go bankrupt after five years, and only 33% make it to 10 years or longer. That is a very high business failure rate.

Here are four causes of business failure:   

1. Lack of money

When you start your own business, you must be willing to use your own savings as capital to keep the business operational and running. Afterward, you can reach out to angel investors or venture capitalists for funding, but they’re highly selective. These investors are looking for growth potential, a large customer base, and healthy market share before they make the decision to fund.

Besides that, new small businesses often offer set prices low, to compete with other businesses offering a similar product. Doing this may work in the short term, but it won’t be profitable in the long term. You’ll need to generate revenue constantly to have a healthy cash flow and profit. If not, you won’t be able to pay rent, workers, utilities, expansion or product development, resulting in your business going bust.

To avoid such issues, having a realistic budget of operations is essential, along with funding analysis and research of potential backers before the money is needed.
  

2. Poor management

When a small business is in its infancy stage, it’s not uncommon to have the owner as the only one in a senior-level or managerial position. Often, they lack the experience of managing and overseeing the day-to-day operations. They may excel in one business area, such as coming up with a new product or service, but they may lack the ability to execute, ranging from developing the product to marketing it.

Remember that operating a business is not a one-man band; a successful business delegates tasks to experienced managers to ensure that the company operates like a well-oiled machine. Unwillingness to do so will eventually result in your business dissolving. A strong management team is critical for every startup so it can continuously grow in the future.

3. Lack of a business plan

Small business owners sometimes forget the importance of having a sound business plan before opening its doors. This lack of planning can be a major cause of business failure if not taken seriously. A business plan is a guide to running your business properly. Without it, you’ll end up lost; think of roaming around a new country without a map. 

A sound business plan should include a description of your business, funding and budget operations, marketing initiatives, competitors, and SWOT analysis. Although you’ve made a business plan, don’t stay too rigid, you must also look at the changes of your industry and be flexible or adaptable with the changing times. There are many business failure stories. Don’t want to end up like Nokia.

4. Insufficient marketing

Marketing plays a vital role in establishing a small business in people’s minds; having a lack of budget and resources can jeopardise the business. If a proper marketing budget for current and future efforts is not set aside from the beginning, it might be difficult to redirect funds from other departments.

Even if you have the funds to launch a campaign, setting a realistic target audience, reach and sales conversion ratio is a must. A marketing team that doesn’t understand this is setting their company up for failure. Teams must take the time to implement the right marketing campaign cost-effectively.

Having a small business may look easy from the outside, but it’s much more challenging in reality, especially considering the causes of business failure. There are many pitfalls and mistakes that you can make if you’re not careful, which can significantly contribute to your business downfall. Nevertheless, if these common pitfalls can be avoided, it will be worth it as you can be your own boss.

Are you starting your own company? Avoid the causes of business failure by staying on top of accounting, compliance, and investments with Lanturn. With Lanturn, you can effectively manage your finances, ensure regulatory compliance, and make informed investment decisions, reducing the risks associated with business failure.

Contact us now!