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The 5 Biggest Reasons Why Small Businesses Fail

Running a small business can be tough, especially during a pandemic.

In New Zealand, just 37% of ‘micro businesses’ (that’s those with <5 staff and <$2m turnover – so yes, a large chunk of our small business community) exist after two years according to Stats NZ.

It can also be incredibly rewarding, and while nobody wants to join the ranks of the small business failure rate, through adversity we can achieve growth that far exceeds anything we would learn if it was easy.

In this blog, we explore 5 of the biggest reasons why small businesses fail, in the hope that this helps you in your own business. Even for those of us who feel we know our business 101’s, now more than ever it is important that we all take the time to remind ourselves of the big picture basics.

The 5 Biggest Reasons Why Small Businesses Fail

1. They don’t have a business plan

What’s the risk?

It can be easy to get excited about an idea, however not all good ideas are profitable. Having a poor business model can create foundational gaps in your business and leave you unprepared to mitigate them.

How to avoid it:

Create a comprehensive business plan, or pick your old one up out of the drawer and give it a thorough review. A strong business plan will push you to consider your customers, competitors and the market at large.

Strategic planning to avoid small business failure and debt collection nz

When creating your business plan, ask yourself the following questions:

  • What vision do you have for your business? If you aren’t clear about where you are headed, how can you get there?
  • What is your Unique Selling Proposition (USP) – the thing that you can do better than your competitors and be known for?
  • Do you have a good handle on what your Strengths, Weaknesses, Opportunities & Threats (SWOT) are, and how to mitigate them?
  • Is your business model is profitable? Do you have strategies to minimise costs and maximise revenue? Doing a mini profit and loss statement on each of your core products or services will help you understand which ones are the breadwinners and allow you to build strategies around this.

2. They haven’t thought deeply enough about marketing

What’s the risk?

Perhaps you have a great product or service, but no one knows about it. Or maybe people know about it, but your presence is inconsistent or is not leaving a lasting impression on the people who matter. Competitors may have already neutralised your USP, or there could be markets out there that you haven’t yet considered.

How to avoid it:

Create a strategic marketing plan that considers marketing from all angles. Analyse your business through the lens of the 5 P’s of Marketing:

  • Product / Service: How does your product present itself to your customers, how could it be developed further to meet their needs, and does it communicate the key features and benefits?
  • Price: How do you set your prices? Once you have considered your costs, what are you able to charge based on your position in the market?
  • Place: How do you deliver your products and what is the customer experience like to get them? This is often the part that will build customer advocacy and give you the reward of repeat business.
  • People: Do you know what your customers wants and needs are? Conducting even some basic research can go a long way. Also consider yourself and your staff – are they set up to deliver the best customer experience?
  • Promotion: Finally, how will you let your target customers know you exist? Think about where your customers are, and the mix of advertising and promotional tactics that are most likely to reach them.

Then, make a plan that includes measurable goals, objectives, strategies and tactics to keep you on track. Who will do what, and when?


3. Poor cashflow management

What’s the risk?

Ultimately, it means unhealthy cash flow and no debt recovery systems in place. Mismanaged inventory can play a big part in small business failure, as can failing to have sufficient cash reserves to see the business through expenditure spikes or drops in revenue. Failing to have a cashflow and debt management plan can often leave you in the wind – the work has been done but customers are using you like a bank, or not paying at all.

How to avoid it:

Plan carefully, create systems, and work with professionals.

  • Use cashflow planning and forecasting tools
  • Seek help and advice from your accountant or bookkeeper when needed
  • Implement a healthy debt management plan that is both preventative and is ready to leap into action when you need it. With EC Credit Control, this involves looking at the whole debt recovery picture:
Debt collection for small businesses means cashflow

Side note: for more information on creating a debt management plan download our Free Guide to Debt Management here or reach out to us.

4. Growing pains

What’s the risk?

It may be that you find your business growing too fast, over-expanding beyond your capacity to execute, or simply dropping critical tasks due to the day-to-day demands on your time.

How to avoid it:

Strategic planning in advance can help guide decision making on the fly, and is also a pivotal tool to take stock and reprioritise if you find yourself over-extended. Plus, remember you can slow things down if you need to. Finally, if a decision is going to impact finances, ensure you have the cash in the bank to pay for it. This is where talking to a professional can really pay off.


5. Trying to do everything yourself

What’s the risk?

We see many small business owners wanting to save money by doing everything themselves, including debt collection, and we understand why. However, the DIY approach often isn’t as effective, especially if you get burnt out quickly or simply don’t have the time or specialist skills for the task.

How to avoid it:

Outsource the tasks you’re less confident in or have less time for, so you have time to focus on the bigger picture. Things like debt recovery, marketing and bookkeeping are a skill. Carefully select who you will work with and soon you will find yourself surrounded by a support network of people who understand your business, each with unique ways in which they can help you when needed.


Use a professional debt recovery agency

Use a professional debt collection agency

Take one of these obstacles off your plate by working with a debt recovery specialist. As a reputable debt collection agency in the business since 1989, we have experience working with businesses of every size and shape, backed up by our specialist small business debt collection team.

Set yourself up for success and talk to us today. We can also help with extensive credit reporting and ensuring you have robust terms of trade – find out how we work.

Ready to talk to EC Credit Control?

We want to help you avoid becoming one of New Zealand’s small business failure statistics, and have our sleeves rolled up and ready to help you. Simply send your questions to our debt management team, or jump straight in and load your debts online today.

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