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Updated Jan 17, 2024

6 Problems That Kill Small Businesses

Money, leadership and employees are just a few problems that destroy small businesses.

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Shayna Waltower, Business Operations Insider and Senior Writer
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This guide was reviewed by a Business News Daily editor to ensure it provides comprehensive and accurate information to aid your buying decision.

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Starting a business comes with inherent challenges and pitfalls. However, even when you’re off to a good start, keeping a company running successfully isn’t for the faint of heart. Many small businesses encounter issues that prove to be insurmountable, leading to business closure and dashed dreams. 

We’ll examine six common problems that can derail small businesses and share tips for navigating or avoiding them to give your company the best chance for success. 

6 problems that kill small businesses

Many entrepreneurs start a business with optimism and high hopes. Unfortunately, according to a LendingTree analysis, more than 30 percent of businesses fail within three years of opening. 

Below are six typical problems that contribute to small business failure and ways to minimize ― or avoid ― their potentially dire ramifications.

1. Poor cash flow can kill a small business. 

New businesses commonly grapple with inadequate financing. According to research from CB Insights, About 38 percent of failed startups attributed their decline to running out of capital. Without adequate capital, staying in business ― let alone expanding ― is nearly impossible. Low revenue, high overhead and expenses contribute to a lack of capital. 

To foster healthy cash flow strategies, developing a financial planning strategy is crucial. Some tips include: 

  • Create a budget: Small business owners should also set and follow a sustainable and realistic business budget.
  • Reach out to investors: Reach out to investors to seek additional capital if you’re concerned about cash flow. Receiving investor funding typically helps you move away from depleting your savings or taking out too many business loans
  • Track expenses: You should also closely track business expenses to see where your money is going and create plans for sufficiently covering your expenses.

“Merely paying bills and depositing the remainder into your bank account can severely impede your business growth,” explained Jason Reynolds, co-owner of Eagle TV Mounting. “Maintaining a solid grasp of your cash flow is essential to tracking and improving your business’ financial position.”

Accounting software can also help business owners closely monitor cash flow so they’re not met with surprises. “You should also consider moving from Excel spreadsheets to a cloud accounting tool to avoid double (or triple) data entries,” Reynolds advised. “Furthermore, analyze your cash flow through a monthly cash flow analysis.”

The best accounting software can help you stay on top of expenses, reserves and cash flow. Check out our QuickBooks Online review to learn about an ideal solution for small businesses.

2. Inadequate leadership can kill a small business.

In many cases, a business owner is the company’s sole leader. While entrepreneurs often take this approach to cut business expenses ― especially in the early days ― they often take on too much responsibility. In other cases, a small business’ leadership team may not be appropriately experienced in managing, guiding and inspiring employees. Either way, leadership mistakes can devastate a small business.

“Incompetent leadership can be detrimental to a business,” Reynolds noted. “To prevent this, it’s essential to establish a clear organizational structure, with designated leaders or managers for each responsibility. It’s also crucial to avoid overburdening these individuals, as this can lead to demotivation and, eventually, turnover.”

Your business’ leadership team is responsible for establishing and implementing your company culture. They model and instill good behavior, workplace ethics and values. Be intentional about bringing on leaders with your business’ best interests at heart. Your leaders should have solid decision-making skills and be collaborative. Consider investing in leadership development programs to help your team obtain and practice core skills.

3. Disengaged employees can kill a small business.

Research from Gallup found that only 32 percent of employees are actively engaged at work. Disengaged employees can lead to high turnover, negatively affect company culture, lower productivity and decrease customer satisfaction.

Attracting employees who align with your business’ mission and values is key to motivating your team ― especially when trying to keep remote workers engaged. According to a Qualtrics study, 70 percent of employees whose values align with their companies’ goals are likely to speak highly of their employers. These employees are also less likely to consider leaving their company than employees who don’t connect with their company’s vision and values.

The key to fostering employee engagement is creating a supportive, encouraging and stimulating work environment. Find ways to create opportunities for professional development, recognize your employees’ accomplishments and promote a healthy work-life balance.

“Think of your business as a small community or family,” advised Libby Diament, founder of Diament Boutiques. “Get to know your employees personally. If you want a cohesive team, spend some time with your employees. Start a group text or take everyone out for a nice meal. Consider offering small perks that don’t cost a lot. Perhaps you can buy a coffee machine that everyone can use. It’s the small things that add up.”

Did You Know?Did you know
Communication is key to employee engagement. Prioritize accuracy, brevity and openness to strengthen your management communication skills.

4. Lack of business planning can kill a small business.

Without a comprehensive business plan, your business has no clear direction. This can result in disorganization among leaders and team members, putting your business closer to failure. Further, many investors will not fund your business without reviewing a business plan.

“A business plan is crucial,” said Calvin Kim, CEO of Coverland. “It describes how your business will compete in the marketplace and how it will be managed. A business plan helps you focus on your key goals and prioritize them, as well as your resources. It keeps you on track and helps prevent you from sacrificing quality in the name of profit.”

A good business plan describes your business’ legal structure, its founders, their business experience and how you’ll finance your business. To create a solid plan:

  • Outline your business’ goals and objectives. 
  • Identify your target customers.
  • Note the pain points you want to address.
  • Detail your intended revenue streams.

5. Strong competition can kill a business. 

CB Insights found that, among all businesses that fail, 20 percent fail because they didn’t properly assess their competition. Small businesses often face stiff competition from more established businesses.

To help your business stand out, conduct a competitive analysis to learn more about others in your niche and identify your business’ competitive advantage. You’ll also need to stay informed about industry trends to stay relevant in the competitive landscape. You may want to consider diversifying your services or product offerings to attract customers looking for something different.

“Small businesses will have to be more creative and innovative to compete with more established companies,” noted Doug Mitchell, CEO of Argenta Field Solutions. “They can offer unique products and services and target niche markets. They can also have an edge by having excellent customer service, making their small business more friendly to customers and [using] customized customer relationship management.”

To give your company a competitive advantage, offer unique products and services based on your business niche market.

6. Inefficient marketing can kill a small business.

Low-return marketing strategies can hurt a business’ revenue streams significantly due to insufficient visibility or delivering the wrong message. According to Failory data, 22 percent of failed startups attributed their collapse to marketing problems.

Small business owners are often short on resources, so they may hesitate to experiment with new approaches in their marketing plans and advertising methods. They may follow typical strategies without realizing every business is unique and requires approaches specific to its model and audience.

“I recommend honing your company’s brand identity so it stands out among your competitors,” advised Nick Valentino, vice president of market operations at Bellhop. “Get publicity by using public relations tactics and optimize your online presence by using various SEO strategies.”

You should also consider investing in marketing campaigns that target your ideal customers, especially via social media. According to a NerdWallet survey, 42 percent of consumers find small businesses to support through social media. Using these digital platforms to your advantage can help you build a strong base of new customers and stay relevant to your existing customers.

Keeping your business alive and thriving

No matter your business’ stage, you may face numerous challenges that can lead to failure if you don’t address them appropriately. While several factors can contribute to your business’ failure, many strategies can help you succeed. Do things right and you might keep the show running even better than in your original vision.

author image
Shayna Waltower, Business Operations Insider and Senior Writer
Shayna Waltower is a business journalist with a multimedia background. She spent years doing on-the-ground reporting in local communities from coast to coast before narrowing her focus to helping small businesses nationwide streamline operations, attract customers and improve profitability. Waltower, with her previous experience in storytelling across mediums (broadcast, social media, etc.), enjoys not only producing digestible guides for business owners that break down complex topics but also helping entrepreneurs competently convey their brand stories to consumers. Over the years, Waltower has developed expertise in a number of wide-ranging but critical business areas and topics, including POS systems, workplace management and cybersecurity.
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