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3 Financial Reasons Small Businesses Fail

Kara Masterson

August 20, 2019

When we think about companies that have failed, we often attribute these failures to bad products or bad management practices. However, history is full of companies that were offering a great product or service but failed despite this, typically due to financial issues. To help you avoid the common financial pitfalls of companies that have failed, here are three financial blunders that all small business owners should be careful to avoid.

There Wasn’t Enough Capital to Begin With

You’ve probably heard the old adage “it takes money to make money.” Unfortunately, there’s a lot of truth to this oft-repeated cliche. With the exception of some businesses that offer only intangible goods, such as consulting or coding services, most businesses need enough capital at their onset in order to get operations off the ground. Even new companies that are offering intangible services still need to have enough capital for marketing and advertising.

There Were Sufficient Funds, but They Were Mismanaged

When a company has plenty of starting capital but fails to generate any meaningful income, it can often be the result of owners who simply don’t know how to manage funds. There are plenty of entrepreneurs who might be wonderful at management and marketing but lack financial prowess. If you’re an entrepreneur who’s inexperienced in managing funds and overseeing spending, consider financial consulting services. Talking to a professional who can guide you through keeping your business financially on track can be the difference between your company staying afloat versus it sinking due to insufficient funding.

Debt Exceeded Profits

All companies will at some point take on debt. Debt can come in the form of owning repayment to the company’s initial investors or it can come in the form of unpaid bills from suppliers. However, a company is doomed to fail when it takes on more debt than it makes in profits. This is why it’s essential that companies practice good bookkeeping and stay on top of accounting for what they’re bringing in versus what they’re spending. While it sounds so simple, too many small business owners have seen their companies fail for the mere fact that they were spending money too fast and earning it too slowly.

Launching a successful small business can be rewarding, but it can also be extremely challenging. If you avoid these three common mistakes, you’ll have a better chance of seeing your small business go on to be successful.

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