6.2: Reasons Small Businesses Succeed or Fail

The success or failure of small businesses is influenced by a variety of factors. Understanding these can help entrepreneurs make informed decisions and improve their chances of success.

Small Business Success

Success hinges on strategic planning, adaptability, customer focus, and sound financial management. Small businesses must remain proactive, monitor performance, and adapt to challenges to thrive in a competitive environment.

Here are some of the reasons small businesses are successful:

• Clear vision and strong planning. A well-defined business plan helps set realistic goals, understand market needs, and devise a growth strategy. Example: A bakery with a unique product line tailored to health-conscious consumers can attract a loyal customer base.
• Financial management. Successful businesses monitor expenses, optimize pricing, and secure adequate funding to manage operations and growth. Example: A café that maintains detailed cash flow records and controls costs can reinvest profits into expansion.
• Understanding the market and customers. Businesses that focus on customer needs, preferences, and feedback often outperform competitors. Example: An e-commerce store offering personalized shopping experiences can build customer loyalty.
• Adaptability and innovation. Thriving businesses adapt to changing trends and innovate to stay competitive. Example: A clothing retailer that shifts to online sales during a pandemic ensures continued revenue.
• Effective leadership and teamwork. Skilled leaders who motivate teams, make informed decisions, and delegate effectively can drive success. Example: A software startup with a strong leadership team and skilled employees can quickly scale operations.

Small Business Failure

There are several factors that contribute to the failure of small businesses, including insufficient cash flow, pricing issues, and lack of focus. However, the main reason is the lack of research and offering a product or a service for which there is no market.^[1]

Failures often stem from internal factors like poor planning, financial mismanagement, or lack of experience, as well as external factors such as economic shifts or market saturation.

Here are some of the reasons small businesses fail:

• Lack of planning. Poor business planning, unclear goals, or a lack of market research often lead to failure. Without a solid business plan, owners struggle to define their target audience, competitive strategy, or financial projections. Example: A restaurant opening without researching local demand or competition may struggle to attract customers.
• Inadequate funding. Insufficient startup capital or poor financial management can cripple a business. Many small businesses underestimate costs or fail to secure necessary funding to sustain operations. Example: A retail store running out of cash before building a stable customer base will likely close.
• Poor marketing and customer understanding. Businesses that fail to connect with their target audience or market their products effectively often see limited growth. Example: A business using outdated marketing strategies may not reach modern, digital-savvy customers.
• Ineffective management. Inexperience, poor decision-making, or inability to delegate can lead to operational inefficiencies. Example: A business owner handling everything alone may burn out and neglect crucial aspects of the business.
• Economic or market challenges. External factors like economic downturns, increased competition, or changing market trends can negatively impact businesses. Example: A travel agency may struggle during a recession or global health crisis, such as COVID-19.

Small Business Statistics

While there are different ways to define a small company in Canada, the most straightforward way is to look at the number of employees. Companies with fewer than 100 staff members are considered small businesses in Canada. As more consumers are shopping online, small companies often do not have the workforce or the know-how to create an online presence, nor pricing, that could compete with larger companies. As a result, many small Canadian companies are struggling, and they do not expect their sales to increase. Yet, small businesses are the backbone of the Canadian economy, making a significant contribution to the Canadian gross domestic product (GDP). They are also vital in keeping the employment numbers up in Canada.^[2]

Below are some statistics about small businesses in Canada:^[3]

• Each small business may only employ a few people, but combined, they are the biggest employers in Canada.
• According to data from Statistics Canada, in 2021, 98.1% of all employer businesses in Canada were small businesses.
• In 2021, they employed 63.8% of the Canadian workforce, which represents 10.3 million people. Medium-sized local businesses employed 21.1% and large businesses 15.1%. These percentages represent 3.4 and 2.4 million people, respectively.
• Data on new small businesses show that 21.5% of small businesses close before the end of their first year. About 50% of small businesses survive for five years, and about 33% get to celebrate ten years in business.
• About 42% of small businesses fail because they have not researched the market and are selling a service or a product that customers are not interested in.
• About 29% of small companies have to close because they run out of money, and 67% of small business owners are using personal funds to try to keep the business running, which is not a strategy that can be applied in the long term. Other reasons that contribute to small business failures include not having the right team (23%), being out-performed by their competition (19%), pricing issues (18%), ignoring the customers’ needs (14%), lack of focus (13%), and failure to make necessary changes (7%).
• About 73.9% of Canadian companies have fewer than ten employees. 55.3% employ fewer than five people, and 18.6% have between five and nine members of staff.
• Baby boomers are the biggest business-owning age group, owning 42% of Canadian companies. The number of small businesses owned by millennials is growing, with 24% of all small companies owned by a millennial in 2019.
• Small and medium-sized companies contribute over half of Canada’s GDP.
• About 58% of small business owners believe a work-life balance is crucial for long-term survival.
• According to Start Up Canada, there were about 3.5 million entrepreneurs and 901,794 small businesses in Canada in October 2021.