A report by the Bureau of Labor Statistics in the USA stated that about 2 in every 10 collapses within their first year of operation. Most businesses that fail do so because they incur losses or lack the finances to sustain their operations. Small businesses can also fail due to the owner making a conscious decision to shut them down due to a lack of profits.
As a business owner, starting your small business and seeing it fail to make money is a devastating experience. There are numerous reasons why your business can fail to make money. When looking to solve the problem of your business not making money, you must first understand the various reasons why this can happen.
In this article, we shall go through some possible reasons why your business is not making money. By going through the causes, you shall be in a better place to make decisions that will better your business revenues.
a) Tough Business Competition
As a business owner, you most probably thought critically about which market need you are aiming to address. The bitter truth about this is that there are probably other people who have thought of the same idea and implemented it.
Business competition is a good factor for clients. It is not a good factor, however, for small businesses. If business competition is very stiff, clients can end up choosing your competition, and you end up without clients.
Lack of clients is the most common reason that causes businesses to fail to make money. If you lack clients, you can opt to work on your marketing strategy to attract new clients. Marketing strategies create the foundation for improving sales in a business.
Another valid option to consider is outsourced demand generation. Outsourced marketing will help to create interest and improve awareness of your business’s services or products. Outsourcing this service also means less work and less expense for your business.
b) Bad Business Choice
A significant number of businesses are starting to fill a gap in the market. This means that the business owner studied the market for a while to note which products would sell well.
However, some people start businesses based on their passions, wants, etc. Sometimes this can be effective. This method of starting a business can lead to your business not making money at all. This happens because you did not ensure that the product or service you are selling fits perfectly with the current market.
Every business owner should ensure they address a market need when opening a business rather than addressing their interests. To ensure that your business makes money, you should evaluate your target market.
If your business is facing this challenge, there are three probable solutions that you have to choose from. The options are:
- Locate a market that needs your product or service and market to them.
- Alter your product to address existing market needs.
- Close down the business to avoid making more losses.
The above-listed options can all be tough to go with for someone who has started their business based on their passion. It is, however, a choice that has to be made.
c) Wrong Pricing Strategy
Every business makes its revenues from the sale of products or services. This, therefore, means that if the product or service pricing is wrong, the business will not make money.
There are several popular methods employed by most businesses to determine their pricing. The first method used is matching pricing with the competition. The other method used is pricing based on how much the business owners feel their products/services are worth.
Both of these methods are wrong if you are aiming to make money and attain your revenue targets. Product or service pricing should be done after analyzing various business factors.
The first factor to consider when deciding pricing should be the legal tax liabilities of the business. Another factor to consider is your target income from the business as a business owner. The final and most vital factor to consider is the business expenses. Product or service pricing should happen in a manner that aligns with all these factors.
d) Poor Financial Management
A common mistake done by many small businesses is failing to track their finances. There is an adage that says, “What gets measured gets managed”. Small businesses fail to update their daily ledgers and cash flow statements.
The key to ensuring that your business makes good profits is to track your business expenditure, inventory, and income. Tracking inventory is an easy task with the use of free inventory apps. Inventory apps help business owners to manage and keep track of product count.
As a small business, you should make a conscious effort to update your cash flow statements weekly.
Proper financial management will help the business track all cash flows. With that knowledge, the business finances can be properly aligned to ensure that the business attains its financial targets.
e) High Business Expenses
As ascertained, most small businesses fail to keep track of their finances. Without doing this, they cannot note if their business has high expenses. A common mistake done by small businesses is overstaffing. Small businesses overstaff in anticipation that they will have many clients because the owner thinks their product is revolutionary.
When establishing a small business, you should strictly allocate finances to all your expenses. Strict finance allocation ensures that you do not overspend on various business expenses. If, for instance, a business sets a budget for its expenditure on staff salaries, the business will derive the number of needed staff from this. The business will therefore not overspend on staffing.
Small businesses can also end up making investments that do not payout. Before making any business investment, you should consider the ROI (Return On Investment) of your investment.
Observing the ROI ensures that you do not increase your business expenses. Increasing the business expenses will render your business financially unstable because it does not make money.
In conclusion, if your small business isn’t making money, it’s crucial to identify the underlying reasons. Five common factors include inadequate marketing strategies, insufficient cash flow management, ineffective cost control, lack of differentiation, and inefficient processes.
Implementing solutions like accounts payable automation can address process inefficiencies, reduce errors, and enhance cash flow management. By identifying and addressing these issues, small businesses can set themselves on the path to financial success and profitability. It’s important to regularly assess and adapt strategies to ensure sustained growth and profitability in a competitive business landscape.