Why Do Some Businesses Fail? Six Key Factors

20% of businesses fail in their first year. Half are gone by year 5. Why is that? What are the main causes? We explore six key factors.

20% of businesses fail in their first year. Half are gone by year 5. These are the statistics from the U.S. Bureau of Labor Statistics. Why is that? What are the main causes? In this post, we will explore six key factors of failure in detail. Learn to avoid these pitfalls, and more importantly see if you can stop doing them before it is too late.

1. Inadequate Cash Flow and Capitalization

In plain English, businesses run out of money. But that’s not simply why businesses fail. The fact of the matter is, it usually could have been avoided. 82% of businesses fail due to poor cash flow management. There are two ways to avoid it. The first is having a rolling 6-12 month forecast of revenues and expenses. This is critical to know where your cash flow pinch point might be so that you can plan to deal with them BEFORE they happen. The second is to have access to capital if you need it. We talked about this at length in a handful of posts that might aid your understanding.

2. Poor Understanding of the Sales Funnel

If you’re like me, you want to get the deal done. Coming from a business-to-customer background and adapting to a business-to-business world was a learning exercise for me. In B2B, sales don’t happen overnight. It’s a long-term process. Therefore, it is critical to understand how your funnel and business plan each work.

How do you get people to the end of the funnel? How predictable, reliable, and repeatable is your process? Next, what behaviors signal you have permission to move to the next level? This is one of the trickiest parts of the process. These are some of the tips we used to help us improve. Hopefully, they can help you, too.

3. Boosting Sales Performance

This first step might be obvious, but it’s harder than most people think. Identifying your target market and more importantly, your ideal client persona is hard. Not only is it key to growth, but it is also important for survival when your business is failing.

Understand your target market and what motivates your ideal prospect

There is a specific reason I used the word “understand.” Knowing the factoids about your market is helpful, but that’s not understanding. Understanding is a step further, it’s the why behind those factoids. For example, we know 50% of businesses fail in the first 5 years. Therefore, it’s obvious they need help, but unless I really understand the reasons behind those failures can I truly offer solutions that are meaningful and relevant.  

Secondly, we can all rattle off statistics about a target prospect. But again, that’s not understanding. These are real people, not numbers. Real people have emotions and motivations that aren’t always understandable from the numbers. We find it helpful to create a persona – give our ideal prospect a name. We try to understand what a day in his or her life is like. This helps us better form a hypothesis of what might be motivating to them. If you don’t want your business to fail, make sure that you know your market.

Do you leave enough time for prospecting?

Prospecting is an everyday chore. It’s hard to do. Rejection is tough no matter who you are. It’s important to leave an hour or two every day to devote to prospecting. We’ve found creating a process can help. Automation can also help if done correctly. It’s hard because so many other ‘urgent’ issues will be tugging on you and demanding your time. But, having someone dedicated to managing the top of the funnel is key to long-term success.

Don’t forget your friends

If you can manage the funnel properly, and you can build relationships even with the “no”s, they may become “yes”s or lead you to them. This is where LinkedIn can be a very valuable tool, as are most modern CRM programs. If you build a relationship with the top of the funnel, there’s always some reason to reconnect – birthday, anniversary, business success, etc. Use those opportunities to reconnect.

Sales funnels are living things

The first and most important step is to create a sales funnel, however hypothetical. The exercise of creating a funnel helps you think strategically about each step. You may be wrong at first, but it’s going through the process that matters. As you learn more and test your hypotheses, you can refine and fine-tune it. An effective, proven funnel is critical to forecasting. Remember what we said about cash flow. Poor forecasting is one of the leading causes of cash flow crises.

Not all leads are equal

The sales funnel will also help you create a process to rank your leads. It’s important to know which leads are more likely to convert than others, so you are spending your time most efficiently. Every interaction with a lead is another opportunity to reassess their ranking. Some automated tools can help, and most CRM programs have this feature.

4. Burnout is Real

Aside from the financial reasons a business fails, many just reach a point of burnout. Poor delegation is usually a main driver. We’ve talked delegation many times in the past, so we’ll gloss over it here. There are only so many hats a person can wear. Knowing which hats are best for you and which are better for others is a crucial step for any growing business.

5. Lack of Diversification

If you have more than 40-50% of your business at one client or customer, you are at risk. If they leave, they can cripple your business. It’s ok to have them now, but you need to have a plan to diversify quickly if you want to be in charge of your destiny.

6. Customers don’t pay on time

We’ve all had them. The customers you must pester week after week to get them to pay. It is a real risk to any non-retail business. This is what results in running paycheck to paycheck. If you must extend credit, it’s worth a look at the Dun and Bradstreet profile. What is their rating? Make sure they understand your payment terms, the scope of the work, and payment policy.

Don’t Let Your Business Fail

While it may seem like there are a lot of reasons why businesses fail, the good news is that by being aware of them, you are more likely to avoid them. Putting time and plans against these risks increase your chances of success even more. So, don’t despair. Remember 50% make it, and you can be one of them if you plan ahead.

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About the Author

Brian Cairns, CEO of Prostrategix Consulting. Over 25 years of business experience as a corporate executive, entrepreneur, and small business owner. For more information, please visit my LinkedIn profile

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