Why Do Most Businesses Fail?

a young man sitting at a desk.

Starting and running a business may be fun and exciting, but it also comes with an inherent risk of failure. This is why we refer to entrepreneurs as risk-takers. They risk their finances and their precious time to start a business that has no guarantee of success.

There are so many moving parts to consider when managing a business. You need to think about your target market, finances, expenses, employees, competition, and so on. Mismanaging any of these facets could lead to the demise of your business.

Why Do Most Businesses Fail?

It’s no secret that more businesses fail than succeed. While this statement shouldn’t deter you from engaging in your entrepreneurial endeavors, it should get you curious about why some entities die before reaching their peak performance.

Knowing why businesses fail can help you ensure your business doesn’t follow the same pathway. So without further ado, here’s a list of 25 reasons that cause the premature closure of a business.

1. Running Out of Money

One of the most common reasons that lead to the demise of a business is a lack of capital to finance growth and operations. Let’s face it – you can’t run or grow a business without money. You need to pay rent, bills, employees, suppliers, and so forth. Without capital, you won’t be able to manage your day-to-day expenses.

Your business can run out of money in two ways: not generating enough revenue to cover your expenses and having customers that don’t pay you for goods or services on time. Both scenarios will hurt your cash flow, and they will lead to you having less capital for your business.

2. Low Sales Volume

Having a low sales volume means you won’t have enough funds to operate your business, let alone pay yourself. It means that you will have to dig into your investor’s pocket to fund daily operations. Without sales, your business will struggle to make profits and get off the ground.

Every business needs to become self-sustaining at one point in its cycle. Aim to have a sales volume that enables you to make a profit, or at least break even. Doing this will ensure you don’t go out of business.

3. Overspending

Overspending is another quick way to sink your business. It may cause you to run out of money quicker than expected. Remember that you need money to fund operations. If you spend your capital in a haphazard or undisciplined way, you may end up lacking finances for essential things such as inventory, rent, and salaries.

As you formulate your business plan, ensure you create a budget for spending funds. Try not to borrow or allocate more funds to your expenditure than is necessary. This way, you won’t feel tempted to overspend.

4. Spiraling Expenses

Having too many expenses reduces the profits your business can make. You’ll end up spending more of your revenue to cover your expenditure than to grow and expand your business. This situation is made worse if your expenses exceed your sales revenue. It will mean that your business is making losses or losing money throughout operations.

You need to keep track of your expenses. They shouldn’t be so high that they hurt your cash flow and profitability. If you can forgo a cost that you don’t need or that isn’t contributing to your business, don’t hesitate to do so.

5. Overexpansion

Overexpansion is another leading cause of failure. Expanding your business in a quick and untamed way can double or even triple your expenses. You’ll have to hire new staff. You’ll also have to spend more cash to sustain the new stores, markets, or product lines. If your sales revenue is not high enough to cover the increasing expenses, you may generate losses or run out of capital.

While it’s not wrong to expand your business into new markets or locations, you need to do it in a steady and rational manner. Ask yourself, “Is my business ready to expand into a new location?” and “Do I have the funds to finance the expansion while ensuring my current branch stays profitable?” Try not to go head over heels into growing without considering if your business is ready.

6. Not Understanding Your Industry

As a business owner, you need to strive to learn all the ins and outs of your industry. Analyzing and understanding your industry will help you innovate and survive the entire business cycle.

If your competitors know your industry better than you, they will adapt quickly and may put you out of business. Familiarize yourself with all the participants in your industry, distribution patterns, and the factors that affect businesses in your industry, among other details.

7. Poor Customer Service

Customers are the lifeblood of any business. You need to ensure they have the best experience purchasing your product or service. Without customers, your entity has a low chance of making sales.

Poor customer service will make your customers turn to your competitors. That will, in turn, hurt your sales and ability to grow the business, which will slowly lead to the demise of your entity.

8. Not Understanding Your Customers and Target Market

Another primary reason that can cause your business to fail is not understanding your target customers. Who are they, and where are they located? What are their wants and needs? Failing to analyze and understand your target market will prevent you from meeting and exceeding your customer’s expectations. In the end, they may opt to go to your competitor who knows want they want.

For example, assume you run an e-commerce business. Most customers who buy online want their products delivered as fast as possible wherever they are. They expect you to ship within the same day or two days at the most. If you don’t understand this customer’s need, you may offer them an unattractive delivery deal. Doing so will leave them dissatisfied with your business.

9. Poor Business Model

A business model outlines how you plan to make money. It’s a strategic guide on how you plan to deliver your products and services to your customers. If your business model is not sound, you may incorporate and implement practices that alienate you from your customers rather than draw you closer.

For example, let’s say you create a business model that sells only through brick-and-mortar stores. Let’s also assume a majority of your customers prefer home delivery and buying online. Your business model will not help you meet your customer’s needs, thus driving them away.

10. Ineffective Business Planning

Some companies fail due to ineffective business planning. Your business plan should clearly describe your entity, strengths and weaknesses, opportunities and threats, and financial and budgetary needs, among other things. It acts as a blueprint for starting and managing the entity and should cover all aspects of the business.

An ineffective business plan may miss essential details such as capital needs and competitor and market analysis. It sets you up for failure even before you launch your operations.

11. Failure to Deliver Real Value

Your product or service needs to offer value to your customers. Offering value can be as simple as making them happy and satisfied or as big as solving one of their problems.

If your product has no real value, it won’t help your customers in any form or fashion. When people don’t buy your products, it leads to inadequate sales and your entity’s gradual demise.

12. Lack of Authenticity and Transparency

Being authentic and transparent helps establish trust with your customers and other stakeholders. If your business lacks these two qualities, your employees may not feel engaged and committed to your mission. Customers may also start to doubt your intentions and thus prefer to purchase from a competitor they trust. Lack of authenticity and transparency might also affect your ability to attract partners and investors to your business since they don’t have faith in you.

13. Failure to Hire and Keep the Right Workforce

Hiring the wrong employees can negatively affect your business in many ways. They may fail to deliver their tasks and deliverables. They may steal from you. They might make mistakes that upset your clients and customers. They can also create a hostile work environment and affect the productivity of others. Whatever it is, you need to do away with ill-fitting employees before they sink your business.

14. Poor Location

Choosing the right location is essential when setting up an office or brick-and-mortar business. The one you select should be accessible to your target market. If you locate in an area where there is no demand for your product or service then it doesn’t make sense to operate there. It should also be safe and appealing to your customers and investors. For example, you shouldn’t choose a location that puts your customers’ safety at risk as they will stay away from your establishment. For more see Choosing the Best Location for Your Business

15. Poor Succession

There comes a time when you, the business owner, may want to retire and leave your business to your heirs or successors. Leaving it to an unqualified individual who doesn’t know the ins and outs of the entity may lead to its death. Strive to appoint your successor in advance and train them before you retire.

16. Starting Your Business for the Wrong Reasons

Why did you start your business? Do you see a problem in the world and want to solve it? Or do you simply want to become wealthy and have more free time? If you start a business for the wrong reasons, you may struggle to overcome the challenges and hurdles that come with it. You’ll find it easier to give up since there isn’t any real passion for starting and running the business. For more see, Reasons To Start a Business

17. Poor Management

Another common reason that causes a business to fail is poor management. Poor management is evident in many ways. You may observe it in how managers treat their employees or make strategic plans and decisions in the business. You may also see it in their approach to leading the organization.

Poor management causes employees to feel demotivated to work. It leads to poor decision-making and administration in other aspects of the business, such as finances and inventory management.

18. Wrong Timing

Sometimes, the closure of a business has nothing to do with the owner, employees, or the business model. It could be just wrong timing. Maybe your business idea or concept was ahead of its time. It could be that customers are not ready for your product or service. They may fail to adopt it as quickly as you thought, which leads to low sales. Without the sales, your business will have little chance of surviving.

19. Doing it All By Yourself

You may be skilled in all aspects of running a business, but you can’t handle everything on your own. Trying to run your business on your own limits your chances of expansion since you are too busy managing every task. You don’t have the time to sit back and strategize on ways to grow. It also leads to burnout because you are handling everything, from accounting to advertising to customer service and so on. You can only do so much. Don’t be afraid to hire employees and recruit partners to help you. For more see How to Hire a New Employee

20. Lack of Vision

Every successful business hinges on a mission or vision. It acts as a roadmap to achieve your business’ short and long-term goals.

Without a vision, your business has no sense of direction. It’s basically just existing or surviving. Customers will quickly get bored with you since they may notice the lack of vision for change or growth. Your company may stagnate while your competitors are innovating and expanding their businesses.

21. Offering Products and Services People Don’t Want

Before going into business, take some time to analyze if customers want your product or service. If they don’t want it, you won’t make enough sales. Without sales, your business won’t cover its costs and expenses. You will quickly run out of money and will have to dig into your pockets.  For more see, Demand for Your Products and Services and Using Passion to Choose Products and Services to Sell.

22. Legal Problems

Failing to comply with legal matters, for example, acquiring regulatory licenses, can lead to your business’s downfall. You may be subject to heavy fines, penalties, and even litigation that may cause you to lose money. Ensure that you acquire all the licenses you need to operate. Also, create a contract between you and other partners to avoid any internal disputes along the way.

23. Bad Partnerships

One primary reason businesses don’t work out is that the partners are a poor match. In the same way, a good partner helps you achieve business success, a bad one can drag you down. They may fail to get their work done, leaving you with more things to handle. They might also have conflicting values from yours. The commitment or the involvement in the day-to-day operations might also be one-sided.

Whichever the case, your business might lose track because not everyone is committed to its success. Before starting your business, take the time to assess and search for the right business partners.

24. Poor Marketing

The worst-case scenario of having a poor marketing strategy is not attracting enough customers to your business. It can hurt your sales and slow your business growth and operation. A lack of sales eventually leads to the closure of a business. Strive to select marketing strategies and avenues that allow you to reach your target market without eating up too much of your advertising budget.

25. Poor Productivity

Poor productivity in business means poor sales. Even if there’s only one person in the company who’s unproductive, they can hurt the performance of your entire business. You need to ensure every partner or employee is doing the best in their roles and responsibilities. If someone is not attending to their duties, something is falling through the cracks. Their lack of commitment may negatively affect your ability to hit business deadlines and goals, which will lead to disappointed customers.


There are so many reasons that can cause your business to fail. Most are within your control as an entrepreneur, but some are not. While failure is a possibility, it shouldn’t deter you from chasing your dream.

Your aim should be to know in advance all the ways your business can fail to avoid those pitfalls. And if you do fail in one way or another, pick yourself up, learn from your mistakes, and try again.


Below are a few resources you can use to expand your knowledge about business failures.

Many links lead to search engine results, giving you the most recent and popular articles.


Books are an excellent way to get a complete picture of a subject. One shortcut you can take is to browse through the table of contents and go to the chapter you’re interested in. You don’t have to read the whole book if you’re only interested in a certain part.

View the most recent Google search results for books related to business failure.

View the most recent books related to business failure on Amazon.


Another source of information to explore newsworthy stories is Google news. Just type in your keyword and get the most recent and archived stories related to your topic. See Google’s news search results related to business failure.


YouTube is a great source of information for visual learners. When I want to expand my knowledge, I use YouTube. Instead of reading about a topic, I would rather listen to someone go over it on video.

Because Google owns YouTube, it naturally has an excellent search engine. Nonetheless, in addition to the topics you’re looking for, you’ll get a list of related topics, and sometimes those topics are related to issues you might not have considered. I often find a hidden gem among the related topics. So the next time you watch YouTube, look at the list of related videos. See the most recent videos related to business failure.