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The Top 5 Reasons Small Businesses Fail

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There're over 1.19 million small businesses (1-100 employees) representing 97.9% of all employer businesses in Canada. Just south of the border, there are 32.5 million small businesses in the USA accounting for 99.9% of all US based businesses!

Small Business Statistics

Not only do small business represent by far the largest proportion of business, they also employ the largest portion of people: 8.2 million people, in Canada, representing 67.7% of the total private labour force.

While just over 100, 000 (101,324) business where opened annually in Canada between 2015 and 2019, unfortunately, 90,151 businesses also closed annually. Further, only 50% of businesses survive to the 10 year mark.

For small business owners, and their advisors, those numbers are perhaps discouraging, if not a bit freighting. But, with the right tools in place you can set yourself up to succeed.

Today we'll be looking at the the biggest reasons small businesses fail how + to avoid them to help you anticipate and plan for the challenges you'll face.

Small is powerful: In Canada only 0.2% or 22,700 of 1.21million businesses are considered large-businesses (500+ employees)!

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The top 5 reasons small businesses fail:

  1. No business plan or poor planning

  2. Not having the financial funding they need

  3. Inadequate Management

     

  4. Poor Cash Management 

  5. Marketing Mishaps  

1. No Business Plan or Poor Planning

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Number one on the list applies especially to new businesses, but established businesses shouldn't underestimate the need to regularly re-evaluate their position and plan.

It's common for business owners, who are extremely passionate and eager to open their business, to neglect or underestimate the importance of a solid business plan.

A strong business plan includes sections on:

  • your product or service

  • your company’s leadership team

  • employees (current and future needs)

  • location

  • marketing strategy and analysis (many business owners are unprepared, or unware of how saturated their market is before opening)

  • financial planning

  • and a of course a budget

Building out a strong business plan will also help with avoiding the next reason on the list by helping you to secure funding from investors and banks.

2. Not Having the Financial Funding they Need

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Perhaps the problem business owners tend to focus on the most, and one that every business has faced at one point or another, is lack of funding.

Successful business owners will know and anticipate their financial needs with proper planning. Like with a business plan, business owners tend to be excited to get their business operations up and running and can be guilty of a 'the money will work out' attitude.

As we saw earlier, only 50% of small businesses survive the first 10 years, making that mindset particularly precarious.

Be realistic about what you can do with the funding you and have, and the amount of funding you expect to receive. As mentioned, a solid business plan will help land more financing from investors.

It can also be helpful to calculate your cash burn rate and runway to see how long you sustain operations in their current state. 

3. Poor Management

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Many small business owners are great technicians, but lack business or management experience (even in a successful small business) - and that's ok!

What do we mean by technicians? We mean that most business owners have a skill or a passion for a something that isn't small business administration or management.

For example, the owner of a bakery or restaurant probably has great recipes and a passion for creating incredible food. It's less likely that they have experience doing things like hiring employees, marketing, competitive analysis, managing employees, and pitching to investors, among the dozens of other tasks needed to successfully run a business.

Bookkeepers, financial advisors, freelance marketers, recruiters, and even your peers can all be great resources to hire or learn from.

4. Poor Cash Management

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According to a U.S. Bank study, 82 % of business failures are linked to poor cash management. That's a massive percentage for a preventable cause, but perhaps unsurprising even with a number of tools available to forecast and manage cash flow.

Again, the typical business owner is likely not a financial expert, and has a hundred different things they are doing each day to keep their business' operations running as smoothly as possible.

Because traditionally cash flow forecasting and cash management involved spending hours in spreadsheets and chasing numbers in bank accounts and accounting systems, its easy to see how it could slip from the list of top priorities.

Further, business owners have a tendency to over fixate on profits and ignore cash flow which can result in business failure. See how even a profitable business can still go-under if they fail to manage their cash properly here.

Every successful company, regardless of industry or location, is ultimately dependent on sound financial management in the long term.

We recommend first making sure you have the fundamental procedures in place and then taking advantage of cash flow forecasting and management software. Check out our list of the top 10 cash management apps for small businesses here to get started.

5. Marketing Mishaps

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Marketing is obviously a key part of any business. You can be incredibly passionate and talented, but if nobody knows about you, no one can buy your service or product.

It's also easy to misjudge or underestimate the effort and cost that need to go into to early marketing campaigns. Compounding this is the fact that most small businesses don't have lots of excess cash on hand.

While planning, make sure to set realistic budgets and targets for marketing. While it can be tempting to try and cut corners in your marketing plan and budget when overall funds are low, ultimately you are only hurting the future of your business.

How to Tell if your Business is Heading in the Wrong Direction

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A cash flow forecast is great way to plan for the future as well as guide you in accounts payable and receivable management.

Cash flow forecasting lets you see your predicted cash position over the coming months allowing you to plan and test for multiple scenarios giving you confidence in your decisions. 

Whether you want to see the impact of a business loan, plan for a hiring a new employee, or know when you'll have the money to replace old equipment, a cash flow forecast is an excellent tool to improve your operational + financial decisions and avoid business failure.

Helm was specifically designed to help small businesses manage their cash and make better decisions. You can learn more about Helm here.

Until next time!