4 Common Issues in Small Business Downfalls 

Small business owners are bound to make mistakes, particularly when first starting out. In fact, there are successful entrepreneurs who proclaim it was a lesson from a misstep that led them to success.

However, some mistakes are the kind that steer a small business toward a downfall. To look closer, here's insight garnered from data and industry experts into the common reasons behind small business failures and how to avoid the missteps that may have led to such a fate.

Cash Flow Issue

Most of the small businesses that close their doors attribute it to cash flow issues, which in general means they just didn't have enough money coming in to continue operating.

More than 82 percent of small businesses that fail cite a cash flow problem as the top reason for the demise, according to a post by SCORE.

That stat likely comes as no surprise to you. Managing cash flow effectively is considered a cornerstone of running a successful business.

As the metric indicates, a negative cash flow is when your business has less money coming in than going out in a given period.

Financial experts say it's not unusual for a business to experience a period of negative cash flow, particularly for new entrepreneurs trying to get returns after initial startup costs. But you don't want to stay in that zone for too long.

"Ultimately, your business needs enough money to cover operating expenses. Uncontrolled or overlooked negative cash flow can render your business unprofitable," explains a post by Intuit's QuickBooks.

Unrealistic Budget, Poor Planning 

Financial planning, including setting a viable budget, is paramount to maintaining positive cash flow. Small businesses without a sound strategy are more likely to experience cash shortages.

"Without the proper game plan, your finances can fall off-kilter and result in negative cash flow," the QuickBooks blog warns.

Keep your budget "lean and mean" even in good times, advises a SCORE article by Brian Sutter, director of marketing for Wasp Barcode Technologies.

"As your business launches and grows, there will be a push and pull between funding and supporting that growth and being conservative with your spending. When in doubt, stay conservative."

Lack of Funding Reserves

Expect and plan for hard times to make sure you can cover unexpected situations such as a drop in revenue or unplanned expenses like equipment maintenance or insurance costs.

Every small business should have a cash reserve as part of its financial strategy. Those without an emergency fund are more susceptible to a negative cash flow problem.

"Do not think that your business will be the sunny exception that never has trouble," says Sutter in the SCORE post.

One issue for some new entrepreneurs is underestimating how much money they need from the beginning, then they lack funds moving forward, says Becky Brownlee, a business owner and area director for the Small Business Development Center (SBDC) at the University of Georgia in Savannah.

"Plan for the worst case and have 1-2 years of operating capital set aside," she says in a post on the SBDC website.

Growing Too Soon or Too Fast

Business experts and experienced entrepreneurs understand the urge to want to expedite growth but moving too fast or too soon could send your business in the wrong direction.

"Without a detailed business growth strategy, expanding too quickly could put your business in the red and leave you struggling with a cash flow deficit," 

Many businesses experiencing success end up failing because they tried to take their business to the next level and it's just too soon, notes Brownlee at the SBDC in Savannah. 

"Just like starting, expanding requires capital. Funding expansion through current operations is risky as it can put the business into a cash flow crisis."

Bottom line, she says, plan for everything, and not just at startup. A thorough plan can help you flush out all the reasons your business may not be successful. "It allows you to make mistakes on paper rather than with your livelihood," Brownlee adds.