10 Common Causes of Business Failure

Business failure is one of the most avoided topics by entrepreneurs. Of course, entrepreneurship is known to be rewarding as well as risky but no one prays for a failed business. Not only money is infused in the idea but also time, effort, and emotions.

This is why entrepreneurs need to study the causes of business failure and try to avoid making such mistakes. Today, we will be looking at the top major and common causes of business failure.

10 Causes of Business Failure You should know

1. Finances

One of the most common reasons why a business fails is finances. The lack of the required capital or funding to keep a business going can paralyze it. When a business has no source of obtaining funds, no doubt, such business is bound to fail.

Apart from the fact that some businesses do not have the required budget to sustain their activities, some short-lived themselves unknowingly. An example is that of a new business that reduces its product price to penetrate the market. While that is a good strategy, it could collapse the business if care is not taken. Don’t forget, profit is important in running a business.

Adequate planning of budgets before venturing into a business with a great number of fund sources and a good market strategy will be enough to prevent business failure in this case.

Read Also: Beyond Bank Loan: 6 Source Of Fund For Your Business

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2. Bad Management

Some businesses experienced failure not because of finances but due to bad management. Lack of good skills, knowledge, and acumen to manage a business may be the cause of a business failure.

For a business to survive many challenges, a good team of dedicated professionals is needed to manage different areas of the business including finance, production, distribution, and so on.

A good way to solve a bad management problem is to outsource the weak areas to professionals in the field. This will not only prevent a possible business failure but also allows the owner to focus on more important matters.

3. No Business Plan/ Lack of Research

A business without a business plan is likely not going to survive challenges. Just because having a good business plan gives the owner the ability to foresee challenges and future problems. It also helps to understand the business model, strategies, and requirements needed before starting.

With a well researched and good business plan, a business is likely going to conquer any problems faced. Having a business plan is a way to prevent business failure.

Read Also: How to Write a Great Business Plan

4. Location

Location is one of the strong determinants of business success. If your business is successful, it means it’s located where your service or product is needed. That’s why market research is highly recommended before starting a business.

Citing your business in a community where your services or products aren’t needed or access may be one of the causes of your business failure.

5. Bad Marketing Strategy

Many small businesses spend a lot of fortune to produce and establishing their businesses neglecting marketing. If you have quality products with little or no one knowing about it, who do you think will buy such products?

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Another related cause of business failure is the lack of product differentiation. Many brands just produce without communicating the differences between their products from others to customers. This boils down to bad marketing strategy again. Why should a customer buy your products if it’s the same as others?

Without good advertising or promotional strategies, your business is as good as dead. You can avoid business failure if only you will outsource to professionals in the marketing field or learn how to do that yourself.

6. Unprofitable Industry

It’s one thing to have a good business idea, it is another thing for it to be profitable. Your business can not be profitable if it isn’t solving any problems or meeting any needs. Establishing a business where there is little or no market and customers is bound to fail.

Not ignoring your customer’s needs and adequate market research is a way to prevent business failure in this case.

7. Poor Customer Relations

The lack of good customer services and relations is what causes business failure for some. A business that treats its customers badly, create a communications gap, and doesn’t allow feedback is bound to fail sooner.

In this situation, losing previous customers and find it difficult to get new ones will be the order of the day. Working on your business customers relation will help you to prevent business failure.

8. Wrong Reasons

Another cause of business failure is when entrepreneurs go into businesses for the wrong reasons. When an entrepreneur goes into a business after seeing how profitable it’s or because of the money in it. Such a business owner is likely to fail in keeping the business afloat. Because he or she is only thinking about the money and probably lacks the knowledge, skills, and passion needed to drive the business successfully.

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Of course, money is one of the motivations for starting a business, it shouldn’t be the only reason.

9. Premature Scaling or Overexpansion

Another cause of business failure is overexpansion and premature scaling. When businesses spend money they do not have on frivolities or things not needed, it affects the things needed. Thereby restricting business success or even causing a failure.

Before thinking of expanding your business, it will be good you asked yourself whether such expansion is beneficial or detrimental.

10. External Factors

Many businesses do not have the problem of bad management, finances, poor customer relations, and others. But they still experience business failure.

Another unpredictable and uncontrollable factors that cause businesses to shut down are external factors. Recession, inflation, government policy, natural disasters, pandemic diseases, and others are the external factors that drive such business failure.

A close example is that of the novel pandemic virus that forces many businesses to shut down in 2020. Even though situations like that are unforeseen and unfortunate, entrepreneurs can still prepare ahead of time and even adapt to the situation quickly. For example, many businesses switch to social media marketing during the COVID-19 era.

Read Also: Difference between a Business Plan and a Business Proposal


If you look at all the above-mentioned causes of business failure, you will realize that it is possible to prevent a business from crashing with adequate knowledge and timely intervention.

Have you ever run a business that fails before? Share with us what causes it, let’s learn together!


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