Why Small Business Fail ?Thirty one reasons for Start up Failure.

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Sheryl Maywood

Sheryl is a marketing whiz and an analytics expert. She's currently studying for her PhD in computational linguistics. She spends most of her time crunching numbers and developing new analytical models to help clients find the best way to market their products. Sheryl also has a knack for creating witty copy that gets people to buy things they never knew they needed!

Ever wondered why Startups fail? When you are starting a business, proper planning and research are absolutely necessary. There is no way of getting around these tasks. Many people get into the business, put up the money, and then fail without ever really knowing why. So they say to themselves,” I know what I did wrong. I’m going to change A,B, and C, and go back and try it again.”So they go back and try it again. And the same thing happens. It is almost predictable.

If you don’t take the time to analyze the prospective business concept, you’ll probably find yourself confronted by one of the following situations:

• Insufficient capital requirements.
• Optimistic market opportunities resulting in an overestimation of projected sales.
• Saturation of the market by the competition.
• Poor access to markets due to a bad location.
• Inadequate equipment projections.

Don,t let this happen to you. Do the required market research and form the necessary plans. On a personal scale, however, your first research and planning step is to assess your start-up requirements, so you will know how much income you are going to need to get your business off the ground.

Consider Reading : What does a social media agency do?

How Much Money  will you need to start a business?

There are a great many philosophies regarding the actual start-up costs associated with a business. We’ve talked with many entrepreneurs who have begun successful operations on a minimal budget, often using bootstrap financing techniques. There is nothing wrong with this approach if you’re willing to sacrifice yourself and invest a great amount of time and energy into making the business work.

But it is also true that under-capitalization is one of the primary reasons for business failure. For instance, if it is going to cost you $500.000 to cover all your startup cents, and you only spend $ 100,000, chances are you are going to fail. It is less a question of “How much” rather than of ” Is it enough?”

To make this determination, you must account for all your start-up costs; not just opening expenses, but initial operating expenses as well.Although different businesses have different costs associated with them, the main start-up costs include the following:


Under many lease agreements, you will be expected to provide the first month’s rent plus a security deposit. Many lessors also require the final month’s rent.

Phone and utilities.

Some telephone and utility companies require deposits, while others do not.A deposit may not be required if you own real estate or have a previously established payment record with the company. Telephone deposits are determined by the number of phones and the type of service required. Deposits for gas and electricity (when required) will vary according to your projected usage. It is possible to lower them by not overestimating your initial consumption of these utilities.


Equipment costs will vary from operation to operation depending on how equipment intensive they are. At a minimum, most businesses need office equipment, signage, and security systems. To determine your costs, list all Of the equipment you must have to operate your business efficiently. Next, price those items by obtaining quotes or bids from several vendors. Three quotes would be a good minimum to start with. Use the quotas you receive to estimate your startup equipment costs.


The broad category of “fixtures” includes such items as partitions. paneling. signage, storage shelves and/or cabinets, lighting, check-out counters, and all shelves, tables. stands, wall systems, showcase and related hardware for product display. The cost of fixtures depends on a number of variables including the store’s location, it,s size and present condition, the type of merchandise to be sold, what kind of image you want it to project, and whether you are purchasing new or used fixtures.


Like equipment, inventory requirements change from business to business. Some businesses such as retail stores are inventory intensive whereas others, such as personal shopping services don,t require any inventory at all except office supplies.

Leasehold improvements.

These non removable installations, either original or the result of remodeling, include carpeting and other flooring, electrical wiring and plumbing, bathrooms, lighting, wall partitions, windows, ceiling tiles, sprinkler systems, security systems some elements of interior designs and sometimes heating and /or air-conditioning systems. The cost of improvements can vary tremendously and you must investigate this carefully.

Licenses and tax deposits.

Most cities and counties require business operators to obtain various licenses or permit to show compliance with local regulations. Licensing costs will vary from business to business in conjunction with the particular start-up requirements. In addition to these fees, you’ll also need start-up capital for tax deposits. Many states require a deposit against future taxes to be collected. Like example, in California. if you project $10,000 in taxable sales for the first three months of operation, you must deposit 7.25 percent ($725) with the state tax bureau when applying for your sales tax permit number.

Marketing budgets.

Most businesses require a strong grand opening push to get their ventures off the ground and build a customer foundation. Most companies determine their first year’s advertising budget as a percentage of projected gross sales. Many businesses peg their ad budgets at 2 to 5 percent of their projected gross sales.

Consider Reading : Twenty Five Social Media Tactics to boost your small business 

Professional services.

During your preopening phase, you’ll need the help a good lawyer and accountant to make sure you meet your legal requirements. Their fees will range according to expertise and region.

Preopening payroll

If your business will be a full-time function for yourself, then you’ll have to set aside a preopening salary of at least one month for yourself in addition to a three-month reserve. This rule of thumb will also apply to any employees you might hire during this phase of business start-up.


Plan on allocating the first quarter’s cost of insurance to get your business rolling.

A word of caution when estimating these costs.

If there is ever a time for conservative realism, exercise it when planning these costs. To assure sour company’s success. a cushion of excess money that can support start-up costs is better than the dilemma of insufficient capital.

How Much Income will a startup company need?

To determine just how much money you have to invest in a business, you must evaluate your finances on the credit and debit sides. Begin by listing all your assets; and their value . Next, list all your debts, credit cards, mortgage, bank notes, personal debts. auto loans, and so on. Now, compute the ratio between total assets and total liabilities to determine your net worth or degree of indebtedness. This ratio is assets: liabilities. The ratio will look something like 2:1, or if you are like most people nowadays. 1:2. This is generally referred to as the acid-test ratio or quick ratio. If your assets exceed liabilities, you should be able to keep the creditors from knocking on your door.

How to evaluate a startup company?

The final phase of evaluating your business is to determine just what type of business would be most suitable for you given all the variable, such as the amount needed to start the business and the income available to support it. To evaluate a business, you must first develop a list of possibilities.

Once you have a list of businesses to choose from, you should audit them, to determine which one would be the best for you. This test simply determines whether or not you feel comfortable with a particular business as you read down the list. The goal is to narrow down your list of opportunities to three or four that elicit the most excitement based on your audit. Then you screen this small group of opportunities according to your personal objectives and lifestyle.

Failure Factors

Why startups fail? Much has been written about business failures. Every year, thousands of business fail- small, medium-size, and big. While business failures know no size boundaries, for years the statistics that four out of five small businesses fail during their first five years have been accepted unquestionably. But no one is sure where that figure came from—and some think the truth is far more promising. Bruce Kirchhoff. professor of entrepreneurship at the New Jersey Institute of Technology in Newark studied small business activity from 1928 to 1986. His numbers, based on Dun and Bradstreet data, indicate that only 18 percent of small businesses started during those years failed (closed with losses to creditors), while 28 percent were voluntary terminations. That means a whopping 54 percent were still in business after eight years.

Although those numbers are encouraging for entrepreneurs, the fact is that the majority of business failures are classified as small businesses. According to data from the Administrative Office of the US courts, more than 98 percent of businesses filing for bankruptcy since 1980 were small firms.

Here are thirty one reasons why startups fail.

Most small business surveys show that the primary reasons for Start-up failure lie in the following areas:

  1. Inefficient control over costs and quality of the product.
  2. Bad stock control
  3. Underpricing of goods sold.
  4. Bad customer relations.
  5. Failure to rate and maintain a favorable public image.
  6. Bad relations with suppliers.
  7. The inability of management to reach decisions and act on them
  8. Failure to keep pace with the management system.
  9. Illness of key personnel.
  10. Reluctance to seek professional assistance.
  11. Failure to minimize taxation through tax planning
  12. Inadequate insurance.
  13. Loss of impetus in Sales.
  14. Bad personnel relations.
  15. Loss of key personnel.
  16. lack of Staff training.
  17. Lack of knowledge of the merchandise.
  18. Inability to cope adequately with competition
  19. Competition disregarded due to complacency
  20. Failure to anticipate market trends
  21. Loose control of liquid assets
  22. Insufficient working capital or incorrect gearing of capital borrowings
  23. Growth without adequate capitalization
  24. Bad budgeting
  25. Ignoring of data on the company,s financial position
  26. Inadequate financial records.
  27. extension Of too much credit
  28. Bad credit control.
  29. Over borrowing: use of too much credit.
  30. Bad control over receivables
  31. Loss o! control through creditors demands.

The last quarter of the twentieth century has witnessed the twin phenomenon of more new businesses being started, and more failing, year by year. This suggests that while business owners may display enthusiasm and a good deal of confidence in opening their business, they also experience a high mortality rate. Lack of planning is the principal or underlying cause of business difficulty. All of these problems, including money-related reasons for failure, are indicators of poor planning. Planning can make the difference between success and failure in business, and that starts with choosing the right business.