Close this search box.

The 10 Most Common Reasons a Small Business Fails

Closed door symbolizing the importance of an Advisory Board for Small Businesses

Share This Post

When starting a business, failure is not the first thing we think about. Unfortunately, the 2021 statistics were devastating! Nearly 32% of startups fail before they reach the second year, 51.1% of businesses fail within five years, and the 10-year survival rate is only 33.6%. 

And, in 2022, things aren’t looking any better. Small businesses are faced with even bigger worries, such as inflation, the war in Ukraine, coronavirus, declines, and disruptions in supply chains. Even though these conditions can significantly affect small companies, they usually make several mistakes that put them out of business. 

In this article, we listed the top 10 common reasons why small businesses fail and mistakes you want to avoid to keep your company running. 

No business plan

This reason is particularly true for a small business owner. What seems like a good idea on paper might not work in reality. But you shouldn’t ignore your dreams. Instead, focus on planning and research. 

A business plan is an essential part of this process because it makes you define your UVP, or Unique Value Proposition – things that differentiate your business from competitors. In the sea of the same hair salons, how will you set yourself apart from similar businesses? Is it the service? Professional products you use? Chic and pleasant interior? Or an attractive price? 

If you maintain a sustainable business model, you will stand out from the competition. The customer base is another crucial thing to consider. Who is your target audience? Will you offer online and in-store shopping? Do you have a marketing plan? How will clients discover your business? 

Answering all these questions while still in the planning stage will help boost your small business’s profitability. 

Business Plan

Not understanding customer’s behavior

How many times have you heard that the customer is always right? Too many to count, right? Customers have high expectations, including small brick-and-mortar and tiny mom-and-pop operations to be equipped with Apple Pay and credit card payment terminals.

They will bash you out on social media and other similar platforms if you don’t deliver. We live in a digital age where it’s easy for customers to share their opinion about businesses they are interacting with. On the other hand, business owners can as well track customers’ feedback. 

 Not sure where to start? Pay attention to all social media channels, Yelp reviews, Google reviews, dedicated customer websites like Trustpilot, and customer surveys. Remember that nearly 85% of customers trust online reviews, so it’s crucial to maintain your reputation. 

Poorly managed inventory 

You can’t expect a successful small business if you poorly manage inventory, which directly affects your cash flow by causing inventory overages and shortages. According to many experts, inventory mismanagement is one of the main reasons why small businesses fail. 

However, you can easily prevent this rookie mistake. Simply install an inventory management software or POS that tracks inventory and offers reports. With its help, you will be able to identify the best and worst-selling products and sales patterns. 


Growing your business too quickly, which includes taking small business loans, can backfire if you hit a rough patch or market changes. 

Taking more than you can chew will drain you financially and cause quality decline. When you are overwhelmed, your products and services will suffer. Instead, try to make smart business decisions and sustainable payment plans. Also, you have the right to say no; it’s a legitimate part of running a business. 

Not enough sales 

Nothing can affect a small business like not hitting those sales goals. This happens when you depend too much on a particular type of customer. For example, if your small coffee shop relies on students during the school year, you should consider offering new services to attract new customers and stay afloat. 

Use existing data to gain analytic insight. This will help you form a sales strategy and hit your sales targets. We suggest you start with a sales system and then move to analysis and strategies. 


Bad location

Is location crucial for the success of your small business? If your business needs walk-in traffic or a professional location to meet with clients, you will need an office in a good neighborhood. A bad location can run even the best-managed companies. 

When hunting for a location, make sure to consider the following things: 

  • The location of your customers 
  • Lighting, traffic, parking, and accessibility
  • Storage needs 
  • Location of your competitors 
  • Safety of the building
  • Community flavor and their receptiveness to a new business

If you work online or don’t have customers entering your business, the ideal location might be your own home. Also, you don’t need a physical address to receive mail, open a virtual mailbox for small business and manage your business mail more conveniently. 

Not focusing on administrative tasks

When planning a small business, you might imagine happy customers, successful marketing campaigns, and of course, a lot of money. You probably never thought that a significant part of your business revolves around administrative tasks.

From bookkeeping and accounting to managing employees and inventory management, this is an ongoing process where you try to meet your financial goals and turn a profit. And, who has the time to deal with administration, right? 

According to some estimates, nearly 47% of small business owners dislike bookkeeping, and 13% aren’t fond of administrative tasks or the time paperwork sucks out of their workday.  

Refusal to change

You would be surprised to know how stubborn small business owners can be, which is one of the reasons their businesses fail. They quickly get obsessed over one idea, even though all the evidence shows it’s not profitable. 

Also, what happens when all the shininess and excitement of your new brick-and-mortar store has worn off and fewer customers are walking through your door? Do you just surrender, or do you develop new business strategies? If locals don’t buy, maybe, it’s time to shift your attention to tourists or get new merchandise your customer base will find appealing.

Not enough data 

Your small business is competing with big corporations like Starbucks or Target, but what do these two have in common? Well, data, lots of data. 

Even though you are operating in a smaller market, you should gather as much data as possible. If you don’t know how your business works in real time, it will be challenging to make any insightful decisions. For instance, you need to have complete insight into revenue and expenses. Without it, you are flying blind. 

As a business owner, you need to know what inventory you can buy, how much money you can allocate to your employee’s wages, or how much rent or utility bills will cost you. If you can’t achieve your financial goals, try to examine the areas where you spend most of your money. 

Poor management 

This is the number one reason why small businesses fail. While entrepreneurs have power over their companies, this power comes with great responsibility. Management is partly about mindset and attitude and can affect your bottom line. 

Sometimes, small business owners are stubborn and don’t want to change how they run their companies. But, don’t fall into this trap or assume your business is doing well because this will wreak havoc if you aren’t careful enough. 

Poor Management 

Why are small businesses important?

Small businesses provide plenty of opportunities for entrepreneurs, jobs for locals, and gathering places for communities. In fact, smaller companies tend to create better job satisfaction than a position in a big company. 

Also, smaller businesses support the local economy, keep the money close to the home, and take care of their communities and neighborhood. 

Types of small businesses

Opening a small business helps you target specific needs and demands within your own community. Understating different types of businesses enables you to develop the structure you actually need. If you are thinking of opening a small business, here are the types you should consider: 

  • Sole proprietorship
  • General partnership
  • Limited partnership (LP)
  • Limited liability company (LLC)
  • Non-profit
  • C corporation
  • S Corporation

How to start an LLC?

An LLC is a way to legally structure your business, but how do you form an LLC? 

  • Choose a name: This is the first step when forming an LLC, and you must come up with a unique one that hasn’t already been registered. 
  • File articles of organization: You can complete this step in your state’s corporate filing office. 
  • Registered agent: LLCs are required to have a registered agent – a company, or an individual who accepts legal papers on their behalf in case someone decides to sue the company. 
  • Manager managed or member manager: Most LLCs choose to be directly controlled by their members. 
  • Operating Agreement: Even though the majority of states don’t require an operating agreement, this internal document establishes how you will run your business. 
  • Regulatory requirements and tax: If you have more than one member, you need to obtain an EIN or employee identification number. Remember to ask about a business license, depending on the type of business, and employer and sales tax.
  • Annual report: In most states, you will be required to file an annual report with a filing fee.

About Author

Picture of Rick Mak

Rick Mak

Rick Mak is a 30-year veteran businessman, having started, bought, and/or sold more than a dozen companies. He has bachelor's degrees in International Business, Finance, and Economics, with masters in both Entrepreneurship and International Law. He has spoken at hundreds of conferences around the world during his career on entrepreneurship, international tax law, asset protection, and company structure. Business Anywhere Editorial Guidelines

Subscribe To Our Newsletter

Get updates and learn from the best

More To Explore

Do You Want To Boost Your Business?