Here's Why 50% Of Businesses Fail Within 5 Years- And How To Avoid It

According to a recent report by the SBA's Office of Advocacy, half of small businesses do not make it to their fifth anniversary. From 1994-2019, only 48.9% made it five years or more, and only 33% made it ten years. The reasons businesses fail are complex and varied, but they tend to fall into four main categories. In this article, we'll discuss the four main reasons businesses fail and how to avoid them.

Businesses Fail Due to Ineffective Business Planning

Ineffective business planning is one of the main reasons businesses do not succeed. Some entrepreneurs have a great idea and run with it without taking the necessary time to think it through. By doing so, they set themselves up for failure. It's critical to think through and develop a business plan before launching a business. A well-developed business plan will have the following:

• A clear business description
• Business structure
• Products and services explanation
• A market analysis
• Marketing and sales plans
• Financial projections

Creating a business plan forces you to find and analyze your competitors (or future competitors) and determine how you are going to be different. Many business owners find out too late that they either don't have customers looking for their product, or there is too much competition in their industry or area. This ultimately forces the company to close because they are unable to generate a sufficient income.

Solution: To avoid ineffective planning, create a well-thought-out business plan and focus on your value. Ensure you have a firm understanding of your industry, your competition, and the value you provide that will attract customers. Re-evaluate your plan often to stay in line with (or ahead of) your competitors.

Businesses Fail Because of Inadequate Management

Another main reason businesses close is due to inadequate management. This can take many forms. Sometimes, owners or founders have no idea how to run a business and end up in financial trouble because of a lack of business acumen. They may have the right idea, a large enough customer base to target, and the drive to succeed but are not able to because of financial mismanagement.

Sometimes business owners are fully capable, but they overextend themselves. They understand how to run a business, but do not know how to delegate or train people to perform certain tasks. As a result, they become a "Chief Everything Officer," doing everything in the business. When this occurs, the likelihood that something will get missed or neglected increases. As a result, the business loses money out of inefficiency or makes a critical mistake it can't recover from.

Solution: Take time to effectively train someone to take over an aspect of your business. When appropriate, hire a capable manager to oversee larger aspects of the business so you can focus your attention on managing your business smoothly. If you don't have a business background, find a mentor to help you avoid costly mistakes.

Businesses Fail Due To Marketing Mistakes

The first mistake many entrepreneurs make is underestimating the importance of effective marketing. Marketing is critical to getting early-stage startups running and maintaining existing businesses. Businesses that market their products or services are much more likely to attract customers than those that do not. You do not need a massive marketing budget, but avoiding marketing is a major reason businesses do not attract enough customers to keep themselves afloat.

Another mistake is spending too much on ineffective marketing. In order for your marketing efforts to pay off, you need to understand your customers, calculate realistic projections for audience reach, and estimate potential sales conversions. Money spent on marketing, if not directed in the right direction, can hasten the business's closure.

Solution: Start by having a website and a social media presence. Social media marketing tends to be much more reasonable than other forms. A professional website can do a lot to draw customers to your business, especially if you create a Google My Business account. Then, utilize your social media account to interact with people and point them to your website and business. If you do pursue other marketing campaigns, make sure you know who your audience is and how to reach them.

Businesses Fail Because They Refuse To Pivot or Change

It's human nature to stay in the same pattern and do things the way they have always been done, but times change and businesses need to be willing to adapt. Businesses that refuse to pivot to market changes or customer preferences will see a reduction in sales and will ultimately close their doors.

Pivoting and making your business more resilient to changes in market demand does not need to be complicated. One of the best ways to pivot to current trends is to bring your sales online. E-commerce sales increased by 40% in quarter one of 2021 alone, a trend that will likely continue. E-commerce is not for every business, but there may come a time when you will need to change your business practice to be competitive. Not doing so will cause you to lose customers to your competitors.

Solution: Pivoting can be difficult when you are used to doing something a particular way, but it's critical to be flexible and change as the market or your customers' preferences change. Launch an e-commerce store, invest in a contactless payment system, or make other necessary changes to stay relevant and competitive in your industry.

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