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Four Main Reasons why Small Businesses Fail, and how You can Avoid them

Four Main Reasons why Small Businesses Fail, and how You can Avoid them

Starting a small business can be one of the best decisions you ever make…if you do it properly.

Small businesses are the cornerstone of a thriving economy, they bring jobs to a variety of communities that could otherwise be lacking in employment, and providing entrepreneurs the chance to explore a variety of tactics encourages healthy competition in the market. On top of that, many major corporation loves to tell their long and illustrious histories, usually starting with their founders starting the company in a small shop or garage. These tales are mostly meant to brag, but they reveal just how high a small business can rise, inspiring generation after generation to take that special idea of theirs and try to turn it into a corporate empire.

Of course, as rewarding as pursuing your own business venture can be, there are so many factors involved that missing even one could potentially leave you ruined. For every one of those corporate success stories that dazzle and wow us, there are thousands of unsuccessful businesses that should serve as cautionary tales. However, because their failures have left them forgotten, so far too often the lessons we should be learning from them go ignored. 


While each industry is different and comes with its own unique challenges, there are still four major mistakes that can ruin any small business:

Incompatible Partnerships

Let’s face it, working with friends can end up ruining friendships. I’m sorry, but just because you and your partners like an idea doesn’t mean you’re all willing to or capable of properly executing it. It’s depressingly common for partners to make promises and plans on how they’ll divide the workload, only for some involved to slack off or not take their share seriously. Mind you, the reverse can be just as detrimental. A partner who insists on taking on more responsibilities than they can handle is sure to find themselves overwhelmed before long, usually leading them to either wallow in guilt over letting the others down or try and shift the blame in an attempt to mask their own disappointment. 

Overlooked Legalities 

This should be obvious, but sometimes the most straightforward aspects are the ones people ignore the most. Indeed, you can’t begin to imagine how many entrepreneurs don’t thoroughly research all factors involved in their business, especially regarding permits and contracts. Even those that do may still fail to consider intellectual property and copyright laws when developing their venture, which leads them into costly lawsuits from companies that have either already developed the idea or companies that steal the idea and copyright it for themselves. As such, it is advisable to have a trusted legal representative you can turn to in order to answer questions you don’t understand and resolve problems you can’t handle. In some cases, such as when your business works internationally, you may require multiple legal reps to make sure you comply will all laws in the areas you will be doing business with.

Mismanaging Money

Money makes the world go ‘round, and your business won’t go anywhere without it. Everyone knows that failing to make a budget is bad, but few realize that failing to stick to your budget is worse. Not only do you need to ensure you will have investment and seed money before moving forward in your venture, but you should try to allocate funds to cover any potential failures that would otherwise leave you in debt as well. Seeking a line a credit in addition to loans is good, the more sources of capital the better, but be wary of tapping into reserves if you can’t even pay off the loans you already took out. That being said, underspending can be just as ruinous as overspending, as failing to properly invest in what your business really needs could cost you the success you otherwise could’ve seized.

Improper Planning

While even the best laid plans can go astray, having plans laid out is still critical. If you don’t understand both your industry and your market before pursuing your business venture, then you’re more than likely to fail. Knowing only one can isn’t enough, it won’t allow you to account for as many possibilities. Then again, even those who do have knowledge on all sides should use it to consider both good outcomes and bad ones alike. If your strategies don’t account for if things go wrong, then they’re worthless. If making back up plans for your back up plans sounds silly, then you’re not taking your business venture seriously, and you may come to regret that.

Make sure you establish long term achievable goals as well as short term milestones, along with solutions should you miss any of them. And above all else, please be willing to adjust your strategy if it doesn’t work. Don’t stick to a plan if it isn’t paying off, learn from the mistake and see to it that you don’t repeat it.

That right there is the key to success, learning from mistakes. Be they your own fumbles or those of others, take advantage of all the experience you can and see that it gets applied effectively. Avoiding these issues won’t guarantee your small business will turn into an international enterprise, but keeping these fundamentals in mind will provide a strong foundation for you to embark on your venture.


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