Flevy Blog is an online business magazine covering Business Strategies, Business Theories, & Business Stories.

Avoid These 5 Common Causes of Small Business Failure

Editor's Note: Take a look at our featured best practice, Growth Strategy (41-slide PowerPoint presentation). The reality is: all businesses face the challenge of achieving sustainable Growth. They need viable Growth Strategies. So, what is Growth Strategy? It is the organization's high-level Corporate Strategy Plan that outlines everything the organization needs to do to achieve its goals for [read more]

Also, if you are interested in becoming an expert on Strategy Development, take a look at Flevy's Strategy Development Frameworks offering here. This is a curated collection of best practice frameworks based on the thought leadership of leading consulting firms, academics, and recognized subject matter experts. By learning and applying these concepts, you can you stay ahead of the curve. Full details here.

* * * *

shutterstock_276300533Want to start a new business? Good luck.

Half of all new businesses fail within five years and more than 66 percent fail within 10 years, according to the U.S. Small Business Administration. The University of Tennessee analyzed thousands of small-business failures in an effort to identify their underlying causes. Here are some of the top causes of small-business failure, along with some strategies on how to avoid them.

Lack of Managerial Competence

An estimated 46 percent of small-business failures stem from incompetence in key business areas, while another 30 percent derive from a lack of managerial experience. Together, these two leading contributors can be summed up as managerial incompetence, U.S. News & World Report states.

One of the best ways to avoid this problem is to gain managerial training and experience by earning an MBA. An MBA program provides training in areas like business strategy, accounting, financing and marketing, and courses also offer opportunities to gain practical managerial experience through internships.

Ineffective Pricing Strategy

When business failures caused by incompetence are broken down into more specific categories, one of the leading areas where businesses fail is often pricing strategy. Setting prices based on emotions rather than logic is the most common problem, while lack of knowledge of industry pricing conventions ranks as the third biggest problem.

Pricing is probably the toughest part of business to get right. To develop an effective pricing strategy, you must first determine the minimum price you can sell a product while still turning a profit. Next, to identify the highest price you can charge without driving customers away, study your niche market, including what your competition is charging, as well as your prospective customers’ buying patterns.

After determining these figures, you can choose from a range of pricing strategies. For example, premium pricing can be used to position your product as superior to your competition and attract luxury buyers, while low pricing can be used to penetrate a cost-conscious market and attract cost-conscious buyers.

Continually test your prices to ensure your strategy remains profitable, while making sure you’re not undercutting potential profits.

Failing to Pay Taxes

Non-payment of taxes also ranks high among causes of small-business failure. Inaccurate reporting, civil fraud, failing to pay on time, filing late and underpaying estimated taxes are some of the most common small-business owner mistakes.

To avoid these mistakes, make tax planning part of your business plan. Research and understand your tax obligations and budget them into your financial planning. Schedule your tax payments ahead of time, and use good accounting and tax preparation software to automate your tax estimation. You can also look to outsource your tax preparation to a trained specialist for optimum results.

Poor Financial Literacy

Lack of financial knowledge is another leading cause of small-business failure. Not knowing how to obtain and manage your financing can cause you to run short of the funds you need to run your business. The best way to avoid financing problems is to prepare a business plan that includes a financial strategy.

If you plan to borrow money, you will need to prepare your key financial statements, which include your income statement, balance sheet and cash flow statement. The SBA provides an online guide to business financing basics.

Poor Recordkeeping

Another major cause of small-business failure is poor recordkeeping. According to Wasp Barcode Technologies, some of the top challenges that result from mismanagement of the books include:

  • Accounts receivable and collections problems
  • Cash flow issues
  • Paperwork management problems
  • Trouble closing the books each month
  • Payroll management headaches

An underlying reason for these problems is the lack of a bookkeeping specialist. Nearly half of small businesses with fewer than 100 employees don’t have a full-time accountant. Hiring a bookkeeper or outsourcing your bookkeeping to a trained expert will alleviate your record-keeping problems.

You should also back up your records with a cloud backup service to ensure you don’t lose any important files for accounting and tax preparation purposes.

25-slide PowerPoint presentation
This presentation introduces a framework for entrepreneurs to use when building and navigating their business from a nascent, startup state to an enterprise with a global footprint. This framework, called the 5 Stages of Business Growth, is based on the fact that all businesses experience common [read more]

Want to Achieve Excellence in Strategy Development?

Gain the knowledge and develop the expertise to become an expert in Strategy Development. Our frameworks are based on the thought leadership of leading consulting firms, academics, and recognized subject matter experts. Click here for full details.

"Strategy without Tactics is the slowest route to victory. Tactics without Strategy is the noise before defeat." - Sun Tzu

For effective Strategy Development and Strategic Planning, we must master both Strategy and Tactics. Our frameworks cover all phases of Strategy, from Strategy Design and Formulation to Strategy Deployment and Execution; as well as all levels of Strategy, from Corporate Strategy to Business Strategy to "Tactical" Strategy. Many of these methodologies are authored by global strategy consulting firms and have been successfully implemented at their Fortune 100 client organizations.

These frameworks include Porter's Five Forces, BCG Growth-Share Matrix, Greiner's Growth Model, Capabilities-driven Strategy (CDS), Business Model Innovation (BMI), Value Chain Analysis (VCA), Endgame Niche Strategies, Value Patterns, Integrated Strategy Model for Value Creation, Scenario Planning, to name a few.

Learn about our Strategy Development Best Practice Frameworks here.

Readers of This Article Are Interested in These Resources

44-slide PowerPoint presentation
In a business landscape where growth is THE key measure of success, driving increases in your revenue and profits isn't just desirable, it's imperative. The Ultimate Revenue Growth Strategy Framework, developed by seasoned consultants from BCG and EY, and trusted by Fortune 500 giants, [read more]

76-slide PowerPoint presentation
271-slide PowerPoint presentation

About Shane Avron

Shane Avron is a freelance writer, specializing in business, general management, enterprise software, and digital technologies. In addition to Flevy, Shane's articles have appeared in Huffington Post, Forbes Magazine, among other business journals.

Complimentary Business Training Guides

Many companies develop robust strategies, but struggle with operationalizing their strategies into implementable steps. This presentation from flevy introduces 12 powerful business frameworks spanning both Strategy Development and Strategy Execution. [Learn more]

  This 48-page whitepaper, authored by consultancy Envisioning, provides the frameworks, tools, and insights needed to manage serious Change—under the backdrop of the business lifecycle. These lifecycle stages are each marked by distinct attributes, challenges, and behaviors. [Learn more]

We've developed a very comprehensive collection of Strategy & Transformation PowerPoint templates for you to use in your own business presentations, spanning topics from Growth Strategy to Brand Development to Innovation to Customer Experience to Strategic Management. [Learn more]

  We have compiled a collection of 10 Lean Six Sigma templates (Excel) and Operational Excellence guides (PowerPoint) by a multitude of LSS experts. These tools cover topics including 8 Disciplines (8D), 5 Why's, 7 Wastes, Value Stream Mapping (VSM), and DMAIC. [Learn more]
Recent Articles by Corporate Function






The Flevy Business Blog (https://flevy.com/blog) is a leading source of information on business strategies, business theories, and business stories. Most of our articles are authored by management consultants and industry executives with over 20 years of experience.

Flevy (https://flevy.com) is the marketplace for business best practices, such as management frameworks, presentation templates, and financial models. Our best practice documents are of the same caliber as those produced by top-tier consulting firms (like McKinsey, Bain, Accenture, BCG, and Deloitte) and used by Fortune 100 organizations. Learn more about Flevy here.

Connect with Flevy:


About Flevy.com   /   Terms   /   Privacy Policy
© . Flevy LLC. All Rights Reserved.