Each year in the U.S., about 627,000 new businesses are created. And, about 595,000 businesses close each year. It’s a bit alarming, isn’t it?
The truth is that starting a small business is exciting, but it can quickly become overwhelming if not handled correctly. Many small businesses face obstacles that can be detrimental if not addressed with proper financial management.
In this article, we’ll talk about five of the top reasons small businesses struggle and how these challenges relate to financial management.
5 Reasons Your Small Business Could Fail
Sometimes, the simplest of things can have detrimental consequences. And when it comes to running a successful small business, cutting corners and taking shortcuts can create far more problems—and cost you valuable time—than doing things right the first time.
Let’s explore five of the reasons we see small businesses start to fail.
- Lack of a Business Plan
A clear business plan is not just a document; it’s a roadmap for success. And, it is often a requirement for small business lending. So why skip it? Without it, businesses often lack direction and objectives, making it hard to achieve growth and sustainability.
A robust business plan helps in planning financial goals and the steps necessary to reach them. It makes sure that every financial decision supports the broader objectives of the business, thus preventing missteps that could lead to failure. And it gives you something to refer back to when deciding how to scale and grow.
- Cash Flow Issues
We already shared the unfortunate statistics on the number of businesses that close each year. And we’re going to send another statistic your way—82% of small businesses don’t make it because of cash flow problems.
Cash flow is the lifeblood of any business. Many small businesses falter because they lack enough cash to handle day-to-day operations or unexpected expenses. Effective financial management involves careful monitoring of cash flow, prioritizing that the business can cover its bills and invest in growth opportunities. This includes planning for regular expenses and preparing for unforeseen costs.
- Poor Management
A recent article from Forbes suggests that an estimated seven out of ten workers in the U.S. would quit because of poor management. And let’s face it. Attrition is expensive—the costs for recruiting, hiring, and training can quickly add up. But that’s not the only reason poor management is such a big problem for small businesses.
Leadership or management failures can contribute significantly to a business’s downfall. Poor financial management, lack of experience, and inadequate oversight can all lead to serious problems. Leaders must understand financial reports, budgeting, and financial planning to make informed decisions that steer the company toward profitability.
- Ineffective Marketing
Remember that business plan we talked about earlier? Your marketing strategy is a key component of that business plan and gives you the opportunity to map out how you are going to reach and convert your target consumers.
A common pitfall for small businesses is not investing in effective marketing strategies. Yet, most successful businesses put 2 – 5% of their revenue toward marketing and advertising expenses. Marketing drives sales by helping to attract and retain customers. Without it, even the best business models can flounder.
Smart financial management allocates funds for marketing initiatives that increase brand awareness and boost sales, ensuring the business remains competitive.
- Ignoring Customer Needs
We’ve all heard stories of how businesses failed to evolve to changing customer needs. And there is no doubt that customers are the cornerstone of any business. Ignoring their needs or failing to adapt to market changes can make a business irrelevant.
Financial management plays a role here by budgeting for market research and product development to meet customer demands and react to market trends, helping the business stay relevant and grow.
Securing Small Business Success Through Strong Financial Management
The path to business success is fraught with challenges, but with sound financial management, these obstacles can be managed successfully. Small businesses need to recognize the importance of financial planning, cash flow management, skilled leadership, strategic marketing, and customer focus. By addressing these areas, businesses can establish a foundation strong enough to support growth and avoid common pitfalls that lead to failure.
If you’re looking to secure your business’s future, consider reaching out to a financial advisor at Korhorn Financial Group who can provide the tools and knowledge necessary for financial success.
