Top 15 reasons why small businesses fail (and how to avoid them)

Starting a small business is exciting and there are many great ideas out there just waiting to be turned into a business. From changing the way people do business to finally transforming that market stall into a shopfront, the possibilities are endless when it comes to new business venture.

That said, having a good idea is just the start when it comes to opening your own small business. Executing it and keeping it successful is where the real challenge is, something that many SMEs owners unfortunately get wrong.

So, if you’ve been toying around with the idea of setting up a business, we’ve got a selection of 15 great tips for what not to do when starting out as a business owner. Avoid these contributing factors for business decline and you will have laid the foundation that will help you survive the first year and enable your small business to flourish thereafter.

1. A failed plan

It may seem like a basic one, but many businesses fail don’t take the time to properly plan for their business’ future. It’s good and well to be eager and wanting to make it all happen, but planning is one step that can’t be overlooked.

Key things to keep in mind when creating a business plan are clearly defining your business, the amount of capital needed to get it up and running, and how business insurance can reduce your businesses’ exposure to risk. While it may sound a little like putting the cart before the horse, setting up your business insurance before your new business opens its doors to customers is recommended. It’s all about taking proactive steps to reduce your exposure to risk.

2. Lack of homework

For many small business owners, not doing the hard yards of research and homework before venturing out can be why their businesses will fail. Before rushing in, take the time to test and develop your products and services before taking them to market. The last thing you want is a bad reputation before you’ve even established your new business.

3. Hiring the wrong people

The people you hire to help run your business will either help make or break it, and in worst-case scenarios they may contribute to your start-up failure. A strong team works together, supports each other and gets the job done with little to no issues. You can benefit from being able to trust that you are all on the same page when it comes to the goal of helping your business succeed. This is also where leadership skills can become invaluable when setting goals and communicating them to the business.

4. Not starting your business journey the right way

Whether it’s your staff, the location of your business, or the supplier of your products, make sure you source your resources well. These are the little things that help keep the cogs of your business turning.

5. Not calculating your costs, budget, and forecasts

To establish if your idea is financially viable, you can estimate the costs of starting and running your business. If accuracy isn’t prioritised here, it can be a factor for business decline in your small business.

While every business is different, there are common costs that all start-up business owners may consider, regardless of whether you are planning a bricks-and-mortar business, to start an online business, or to buy into an existing business or franchise. Inaccurate financial forecasting is another common reason for small business start-up failure.

6. Choosing the wrong business structure

Choosing the business structure you want for your small business (sole trader, partnership, trust, or company) will determine a number of key factors, including how much business tax you will pay, your legal status, how much administration you’ll need to do, and your ability to raise funds. As such, it’s important to select the business structure that best suits your new business. An accountant and/or solicitor can help here.

7. Not staying on top of your finances

To survive the first year and beyond as a small business owner, it goes without saying that you will benefit from keeping a close eye on your finances. When it comes to getting on top of your business finances, there are a few important things you will benefit from ticking off, including:

  • cleaning up your personal finances (have your financial records organised if you intend to apply for a business loan);
  • determining if you will apply for a small business loan, business credit card, or any other type of business funding;
  • setting up a business bank account;
  • appointing an accountant and/or bookkeeper;
  • registering your business and applying for GST payments;
  • setting up your small business accounting systems, reporting and processes; and
  • managing your cash flow.

8. Not setting up your business premises adequately

Finding the right location for your new business can be a time-consuming and costly process. The factors that will determine the best location for your business will vary depending on the type of business you are starting and the sector you work in.

Before you sign a long-term commercial lease for your new business premises, ensure that it meets the essential requirements for your specific business needs. Learn the fundamentals for finding the perfect location and the costs associated with buying, leasing, and fitting out your new business premises.

9. Not creating a marketing strategy and plan

While 48 per cent of new Australian businesses fail within the first four years, and only 77 per cent survive the first year, to endure long-term, there is a clear case for small business owners to have a long-term strategic plan in place.

The first step in that plan is developing a marketing strategy and plan to market your business.

A well-developed marketing plan will give you insights and an understanding of who your target audience is, what motivates them, and how you can most effectively promote your products and services to them. Once you’ve nailed that, you essentially have the framework for your marketing strategy and plan, which you can use to grow your business.

10. Ineffective marketing

Not investing marketing is one problem, but another marketing-related problem for small businesses is poor marketing. For marketing to work, it needs to do three important things: raise awareness about your business, connect with your target audience, and convince them to contact you. Ineffective marketing won’t achieve any of these goals for your business.

11. Not seeking support

Small business owners may sometimes feel like they have to go it alone. However, with a reported 60 per cent of small business owners failing in three years, not seeking help when help is needed may lead to even bigger problems in your business. Remember that there is certainly no shame in seeking help with your business when the going gets tough. It happens to the best of us.

Small business owners may sometimes feel like they have to go it alone. However, not seeking support can be a key reason why your small business may fail. Whether it’s a financial adviser, a business coach, a mentor, a great tax accountant, or even a business networking group, there are many options for support if you feel your business can benefit from a little external help.

12. Too little capital to get up and running properly

Stretching out your finances at the start can mean your business may not really get off the ground financially, and you’ll still have a lot of cash to repay. A lean management strategy may be warranted in this phase in particular, but it can be applied even after this phase. Try to think of multiple channels for attracting funding for your business, which may require some creative thinking to discover alternative sources of financing.

13. Poor location and poor online presence

A bad location is self-explanatory if your business relies on its location for foot traffic. Just as dangerous, however, is a poor online presence if you choose to start an online business. These days, your online presence (your website and your social media activity) can be just as important as your company’s physical location in a shopping district. An engaging and persuasive online presence will let potential customers know that they can trust your business.

14. Not investigating the market

So, you’ve always wanted to open your own business, and you finally have the means to do so. However, you may benefit from tempering your enthusiasm to get going immediately. Remember the ‘five P’s’ of ‘prior planning prevents poor performance’.

To increase your chances of success, consider thoroughly investigating the market and the industry you plan on entering. After all, it’s a lot easier to satisfy a current need than create one and convince people that they should spend money on it.

15. Not being flexible

Once you’ve done the planning, established your business, and gained a customer base, you may benefit from avoiding complacency. Remember that the need that your business is fulfilling may not always be there, so monitor the market and know when you may benefit from pivoting your business plan.

Are you a sole trader looking for a business from home checklist? Or perhaps you’re a small business owner seeking a handy to do list. Either way, these tips can help you avoid common small business pitfalls.

At BizCover, we can help make your business dream a reality by providing drama-free business insurance options to help protect your business from unwanted challenges. Visit us online or give us a call on 1300 920 863 to receive multiple quotes from some of Australia’s leading insurers. Experience insurance made easy today.

* This information is a general guide only and does not take into account your objectives, financial situation or needs. As with any insurance, cover will be subject to the terms, conditions and exclusions contained in the policy wording. The information contained on this web page is general only and should not be relied upon as advice.

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