Small Business Tips

Why Businesses Fail and How to Avoid Common Mistakes

Justine Rabideau
Close up view on hand of business woman stopping falling blocks on table

Starting a business is an exciting adventure that’s extremely rewarding if done right. On the other hand, if you don’t know what you’re doing, you could end up like the eight out of ten entrepreneurs whose businesses fail within the first two years. Ouch.

Despite the dismal statistics on business failure, you have a great chance of success. You just need to learn how to dodge common mistakes that cause businesses to crash and burn. So without further ado, here’s how to avoid business failure in six easy steps.

1. Develop a business plan

Were you the type of college student who never created a draft when writing a paper or who waited until the last minute to clumsily write all your thoughts down? If so, you probably need to change your strategy to avoid business failure. Every business needs a detailed business plan in order to succeed. Your business plan should include (at a minimum): your basic business concept, a marketing plan and a few goals with strategies to reach them.

2. Avoid unnecessary debt

The first time you get a small business loan, your eyes might light up like a kid who’s just been given Dad’s credit card. But before you go crazy and start buying everything in Office Max, take the time to sit down and create a list of what you really need. It’s almost impossible to completely avoid debt when you’re starting a new business, but you can prevent small business failure by avoiding excessive and unnecessary debt.

Use your loan for basic needs and be cautious about going into debt for things you don’t need right away. You can also save money by renting equipment instead of buying it up-front. Remember, the more debt you go into right now, the longer your money will be tied up in repaying your debt. Wouldn’t you rather use that money to expand your customer base, market your products and grow your business?

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3. Manage your cash flow

If you’re getting dizzy trying to balance your expenses with your cash inflow, you’re not alone. Most companies have cash flow issues at some point. However, you’ll have an easier time hanging onto your money and staying in business if you pay attention to your finances. Remember to manage your cash flow before it manages you. Here are a few suggestions:

  • Create a separate bank account for your business
  • Identify upcoming business risks and prepare for them in advance
  • Always keep a “stash” of buffer money
  • Monitor your inventory to identify where you’re losing money
  • Cut costs whenever possible
  • Keep growing your business to improve your positive cash flow
  • Keep track of all spending and reimbursements

You don’t have to be a professional accountant to keep your finances under control. Just monitor your spending and download accounting software to help you keep your finances in order. On the other hand, if you flunked math in college, you may want to consider hiring an accountant as soon as your small business is large enough to bring on staff.

4. Make realistic projections

Most entrepreneurs are optimists and tend to have idealistic views of the world. This can be a great strength when you’re starting a new business, but it can also set you up for disappointment. When developing revenue and cost projections for your business, it’s important to walk the fine line between optimism and realism. Make sure your projections are accurate so you don’t run into any unpleasant surprises down the road.

5. Don’t self-sabotage

You’re probably raising your eyebrow at this point, thinking “why in the world would I sabotage my own business?” No one sets out to cause their business to fail, but many end up inadvertently self-sabotaging by making unwise choices.

If you want to succeed as an entrepreneur, own your decisions and gain the skills necessary to help your business succeed. Identify your key weaknesses and address them before they cause you to make poor decisions that can weaken or destroy your new company. In short, become a leader and do what it takes to help your business flourish.

6. Value your customers

The minute you become a business owner, you give away your right to talk down to customers. Remember, your customers ultimately hold the key to your success or failure, so treat them the way you would want to be treated.

Go out of your way to get in touch with your customers and earn their loyalty. You can do this by learning who your target customers are and appealing to them through advertising, special offers, a customer loyalty program and superb customer service. Always welcome feedback from your customers (yes, even the whiny ones who complain about everything) and learn from it.

Now that you know how to avoid business failure, make sure you implement these six steps into your management approach. You’ll not only avoid the common mistakes failing business make, but you’ll increase your chance of becoming a business that thrives instead of survives.