Accounting Advice

Ten Reasons Your Small Business Will Fail (And How to Avoid It)

Ten Reasons Your Small Business Will Fail (And How to Avoid Each)

Just because small business ownership is a popular endeavor nowadays, it doesn't guarantee that they are all successful.  As an outsourced accounting firm, Accountfully sees the ins-and-outs of hundreds of small business clients each year.  We see the reasons behind both success and failure, on an intimate level. 

While outside factors can be at play, there are some pretty safe bets that dictate whether or not a business will be a success or failure.  Take heed of these common business killers, and learn ways to safeguard against–or come back from–each one.

1. Lack of Market Research:

The success of a business has a direct relationship with how much need there is in the market.  Especially for entrepreneurs in the consumer packaged goods (CPG) space, knowing if your target customer wants what you are selling is step one in deciding whether or not you should go into business. 

Failure to conduct thorough market research can leave a business without a clear understanding of customer needs and industry trends. To avoid this, invest time and resources in comprehensive market analysis before launching your product or service.  

Furthermore, market fit and research does not stop once you launch.   You will need to constantly reestablish fit on a regular basis to remain successful.  For example, customers may like the product itself, but prefer a different type or aesthetic in packaging.  If you sell a protein bar for example,  they may be more inclined to buy your product in different quantities, like a variety pack of smaller sizes they can take on trips, versus a larger single bar.  For service-based companies, maybe a scaled-back or intro-level version of your popular services will meet a bigger need for startups or smaller budgets.  

Even our tax laws recognize the importance of research and development for companies.  Depending on certain factors, you can earn tax benefits from doing full-scale, science/evidence-based research and development.  Doing it the correct way may really pay off.                                                                                                                   

2. Not Prioritizing Foundational Profitability From the Beginning

As accountants, we are trained in the old-school but effective concept of EBITDA: earnings before interest, taxes, depreciation, and amortization.  There’s a reason this concept is so important.  It requires establishing the health and sustainability of a company from the ground up.  As the business grows, it will become, and remain a healthy, profitable enterprise.  One of the most destructive patterns we witnessed in prior years was a trend to grow top-line revenue, without necessarily bringing a level of profitability along with the growth.  What this did was show a (false) promising picture to investors to raise cash and/or sell the company, but it killed off these businesses once the slow and steady IV drip of cash dried up.  

Avoid this major mistake by building your business from classic finance principles.  Do the research and take the time to figure out how the business needs to function with profitability at the forefront. 

▶︎ Product companies:  get to know your cost of goods sold (COGS). 
▶︎ Service companies: understand your billable rate.

3.  Spreading Yourself Too Thin Across Too Many Sales/ Too Many Channels Too Soon

One of the most damaging preconceptions of product companies is the thinking that more sales channels equate to more success and brand awareness.  CPG companies who sell omnichannel also need to apply the EBITDA and market fit concept across all of their sales channels to ensure they are bringing in a reasonable amount of profit in each.  

With each sale across not only direct sales on the website, but also popular channels like Amazon, Shopify, Faire, retail/grocery, they need to all pull their own weight.  The marketing and sales fees can add up quickly when you do a deep dive into each.  Co-packer and warehousing fees are also a big surprise spend; from fees to lost or damaged inventory. 

If you are a brand that sells through grocery distributors like UNFI and KeHe, you can also be hit with some aggressive chargebacks and deductions that will nuke any opportunity to make money selling wholesale.

You will need to weigh out the cost-to-benefit ratio across each sales channel.   Maybe one channel, like Amazon, will not be the most profitable, but it supports a healthy flow of new customers.  Either way, it should not be deadweight or cost you money.  

Avoid this by understanding your margins and making a plan to build enough profit into your product to sell through each and be sustainable.  Invest heavily into direct to consumer channels at the start.  This allows you less spend up front, and gives you direct access to your consumer.  You can learn who buys what, when, where, and common behavior that will support smart decisions when it comes time to launch in other markets and channels.  It will also support a healthy marketing strategy.  Knowing who and where to target will be key in minimizing unneeded ad expense.

Inline with spreading over too much too soon, we have to remind business owners this simple fact:  your margins do not magically increase the more you grow. 

So many additional expenses appear as you become a larger-scale company that doesn't necessarily support higher margins.  More people, more overhead, etc. will eat into what was once a highly profitable product.

Service companies, this one applies to you too!  Don’t get caught up in taking all of the jobs and hiring all of the people too soon.  Spend the time to understand which jobs/projects are profitable and what your true costs are from both an overhead and an employee/labor perspective.  Knowing how efficient your team and overhead needs to be in order to be profitable will save you the heartache of chasing any and every job just to keep revenue coming in to support the expense.

4.  Over-spending On Things You Don’t Need as a Start Up

Speaking of too much, too soon is number four on the list; spending too much on things you don’t need.  Part of being financially responsible is being extra-invested in where your money goes as you are starting a business and prioritizing cash.  Do not get suckered-in to spending five-figures on a detailed financial plan and “hypothetical” model with 4,000 tabs in a variety of colors that you will never use.  You do not need to hire a full suite of in-house employees like HR directors, CFOs or high-level marketing strategists the moment you get an infusion of cash.  Save these hires for when you are more established and have a clear sense of where you need to go.  These duties can be outsourced and scaled to your needs at the time you need them.  

Other overhead expenses that won’t serve you in the beginning are things like office space, a barrage of online ads, and trade show attendance as an exhibitor.  Be smart and agile as you get rolling and gain the benefits of these classic money pits on a less intense level.  Build a simple model and budget/forecast for yourself in Google Sheets.  Make something you will use and be involved with daily or weekly, and can easily update and share with colleagues or investors.  Walk the trade show floor and shake hands with key stakeholders without being chained to a $5,000 booth.

Poor financial planning, cash flow mismanagement, or excessive spending can lead to financial instability. Mitigate this risk by creating a realistic budget, regularly monitoring cash flow, and having a contingency plan for unforeseen expenses.

5.    Trying to Do Too Much On Your Own to “Save” Money

Just because you are an entrepreneur with your own business, does not mean you magically earned a degree in finance, accounting, operations, marketing, and human resources.  Sure, you may actually be a pro in one of these areas by trade, but chances are the thing that fired your passion for starting a business was not the DIY bookkeeping you were going to do every week.  It was your product or service that you knew would take the world by storm if only you could share it.  

Allow us to officially tell you you are off the hook.  You won't be less of an entrepreneur if you decide to outsource your accounting or marketing, or operations, or human resources.  It allows you to dedicate your talent to growing your business and becoming successful.  Find flexible service providers that can support this work as it becomes too burdensome for you.  Allow them to grow alongside you until it makes more sense to have some of these functions in-house

Take note:  as you are in super start-up mode, it is doable to manage some of the basics, like reconciling bank statements, sending invoices and paying bills.  It allows you to get intimate with the inner workings of your business and establishes good habits of being involved in the books.  However, don’t let this consume too much of your time.  Know when to delegate and how.

6.  Ignoring Technology Trends

Businesses that fail to embrace technological advancements risk becoming obsolete. Stay ahead by consistently adopting relevant technologies, understanding their impact on your industry (and people), and integrating them into your operations.  In today’s modern economy and job market, you will need to embrace cloud-based tech that is scalable and sustainable long term.  Be open to remote employees, and enlist modern time-keeping and payroll software.  When your team knows they will be paid easily and can track time from anywhere with an internet connection, you will reap the benefits of an efficient, happy team.  Having cloud-based systems allows for remote collaboration internally, and with clients.  Being able to access key systems or records from anywhere in the world means your business continuity is healthy as well.  

Accountfully was built on the foundation of using tech that was modern and agile.  Our clients enjoy our systems as they support easy functionality across their business, from inventory management, to bill paying.  Most of these are a minimal monthly fee, but support a wide range of benefits to a business, and can grow as a business requires more functionality.

7.  Lackluster Tax Practices

Paying taxes is often met with feelings of distress and overwhelm.  Take it from Accountfully’s tax team–the more you understand about taxes and how to position your business properly, the less “scary” they get.  There are a lot of tax-related outcomes that are a direct result of various choices and factors when starting a business.  This can range from the type of entity you own, to how you report your income and expenses, and how you hire, and beyond.  A common misconception is that everything you do and report needs to equate to nothing owed every year.  

What would you say if we told you that paying taxes probably means you have a successful business?  The trick is to proactively approach them with a plan and a strategy. 

That is not Joe Schmo, CPA sitting behind a pile of papers stacked on his mahogany desk that you call once a year to file things for you.  It is also not a mad sprint through TurboTax flying blind until your tax outcome equals zero dollars.  

Being a proactive business owner is seeking out a team of tax professionals before you need them.  Pick a team that knows current regulations and laws, and stays in communication throughout the entire process of tax filing and planning.  They should map out a plan that keeps tax outcomes within reach and ensures a plan that aligns with your future business goals.

A big trend we see is when businesses do not do their due diligence when it comes to sales tax reporting.  That successful ecommerce company that does a ton of sales in their print-on-demand merch ships from a warehouse in Virginia, but the company is based in California.  Not registering and paying in that state means fines, back-taxes owed and frustration all around.  Or how about the company that pays contractors and forgets to get their W-9 forms?  That means risk of non-compliance as well as thousands of dollars that are not properly accounted for through 1099s.

When it comes to taxes, it is integral to the future success of your company to be proactive and plan ahead based on your goals. 

For example, reporting five years of a loss and asking for money from investors probably won’t turn out positively.  If you are earning money and plan for the future, you can handle the tax expense and put yourself in a better position to grow or sell your business.  

Simply put, address taxes as a year-round endeavor and embrace the fact that if you are paying taxes, you are making money.  Yay, you!

8. Failure to Adapt:

Business and economic environments are constantly evolving, and failure to adapt to changes in consumer behavior, market trends, or regulations can be detrimental. As a business owner, your goal is to be looking ahead and driving the business forward with success.  The vision of that success may not be the same one as when you started, and that is OK.  

This harkens back to the proactive and constant product-market fit.  A great example is one of our longest-tenured clients who was slowly leaking money by being too general with their service offerings.  In a down economy, they continued to struggle with inflow and assumed this catch-all strategy would keep them afloat.  By mapping out various cash scenarios in a model we built for them in their The Digital Agency Workbook, they soon realized “catch-all” was not sustainable.  Sure, they were great at what they did, but it was wringing the team dry just to stay afloat.  They were at risk of losing cash and talent.  They adapted and changed their pricing and business model as a result of this proactive planning, and have shot ahead in growth and profit ever since.  

The lesson here is that clinging to an old, outdated version of yourself as a business will not benefit your growth.  It is also a lesson learned that simple modeling and looking ahead in a way that you can dig into is beneficial to seeing how the cash flow will play out in the future.

Stay agile by regularly reassessing your business strategy and adjusting accordingly.  Consult a team that can help you translate the numbers and stay ahead of the game.

9. Ignoring Legal Compliance and Not Protecting Your Ass(ets):

Overlooking legal obligations can lead to fines, lawsuits, and damage to a company's reputation.  Don’t go out of business because you didn’t know that your product name was already trademarked, or a recall wasn’t covered by your insurance policy.  Again, the underlying theme here is to consult professionals proactively to make sure you have covered all bases.  Investing in these proactive exercises can save your cash flow or the entire business from ruin.  

This is less in our direct wheelhouse, but we do know there are a lot of helpful service providers that specialize in various industries that can support your business needs in these areas. 

Stay compliant with regulations relevant to your industry, consult legal professionals when needed, and regularly update policies to align with legal changes.

Ensure your business insurance is covering what is truly important and not wasting too much cash on blanket coverage policies.

10. Lack Of A Clear Exit Strategy

Rounding out the ten ways to fail is the exit strategy.  Never lose sight of where the road may end with you and your business as one.  Without a well-defined exit strategy, a business may find itself unprepared for unforeseen circumstances or opportunities. For example, a mature business that is thriving financially, but still uses cash basis accounting is not setting itself up well for valuation.  

Develop a clear plan outlining how you would exit the business, whether through selling, merging, or passing it on to successors.  Operate in a way that will get you to the end goal regularly so you make those monthly/quarterly/yearly decisions tactfully.  Know when to use GAAP based accounting, or what type of entity structure makes sense when hitting key milestones that will influence big decisions, like getting in front of investors, or selling.

At The End of the Day, We Want You to Be Successful

Take it from the team who is on the front lines of both business success and business failure.  Our true hope for you is to be successful.  These ten areas are not a catch-all by any means, but they will help you in avoiding some of the no-brainers that can lead to a business's demise.  

Navigating the complexities of entrepreneurship requires foresight, adaptability, and a commitment to continuous improvement. By recognizing these common pitfalls and implementing proactive strategies, business owners can significantly enhance their chances of building a resilient and successful enterprise.  
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