Do you know what’s more shocking than the failure rate itself? The reasons behind it. Imagine pouring your heart, savings, and soul into a dream, only to watch it crumble within a few short years. Sounds harsh, right? But this is the reality for about 9 out of 10 small businesses.

Understanding why most businesses fail, especially from a financial perspective, could be the one thing that saves yours.

The numbers don’t lie, but sometimes, business owners do (to themselves)

One of the biggest culprits behind small business failure is poor accounting practices. It’s not just about not having enough money, it’s about not knowing where the money is going.

Think of your business finances like your car dashboard. If you’re driving 100 miles an hour with a blindfold on, you’re bound to crash. That’s what happens when business owners run operations without proper bookkeeping, budgeting, or financial forecasting.

In this article, we’ll explore Why Do 90% of Small Businesses Fail?, some accounting and financial errors that can put your small business at risk, and how to avoid them.

Why Do 90% of Small Businesses Fail?

According to Jessie Hagen’s research, formerly with the U.S. Bank and cited on the SCORE, the reason small businesses fail overwhelmingly includes cash flow issues. These issues include poor cash flow management, starting out with too little money, and a lack of a developed business plan.

• Poor cash flow management skills (reported by 82% of closed businesses).
• Starting with too little money (79%).
• Lack of a well-developed business plan (78%).
• Not budgeting properly (77%).
• Being overly optimistic about achievable sales, money required, and what needs to be done to be successful (73%).
• Not recognising or ignoring what they don’t do well and not seeking help from experts (70%). 

Understanding the reasons why small businesses fail is the first step toward preventing failure. 

Let’s break down exactly how accounting and financial errors could be pushing your business toward failure, and how you can fix them before it’s too late.

Mixing Business and Personal Finances

One of the most important factors to lead your business to failure is mixing finances. Business and residential buying activities should not exclusively share the same invoice. A Clutch poll indicates that over 25% of small business owners operate their companies without separate bank accounts.

Let’s start with a common mistake:  You use your personal card to pay for office supplies. Or maybe you cover your cell phone bill using your business account. You tell yourself you’ll sort it out later. But eventually, your records become a tangled mess. Come tax season, you have no idea what’s deductible and what’s not. Worse, if you ever face an audit or need funding, your financial credibility collapses fast.

But don’t worry, we got a solution for you! Open a dedicated business checking account. Use accounting softwares like Wave, QuickBooks, and track every transaction; yes, even the small ones. Ensuring a clear separation between business and personal finances is essential for you to maintain accurate financial records. 

Running a Business Without Budgeting 

Do you know how much you spent last month? How much profit did you make? What percentage of your revenue goes to overhead? If you don’t, you are at risk. You wouldn’t drive cross-country without GPS. So, why are you running your business without a budget? Running without a budget is like running blind folded. 

A budget isn’t a restriction. It’s a roadmap. It tells you where your money’s going, what you can afford, and when it’s time to pull back or invest more.

Businesses without budgets overspend without realising it. They miss out on opportunities because they aren’t sure if they can afford it. Without a budget, businesses constantly feel like they’re one bill away from crisis. Creating a budget doesn’t take you a finance degree, it takes you a few honest hours with your numbers. The payoff? Peace of your mind and smarter decisions.

According to a Clutch survey, 61% of small businesses don’t create an official budget. No surprise that many of them don’t survive. Because “no budget = no strategy.” Don’t Know what to do? You can set a monthly budget for expenses, revenue, taxes, and savings. Monitor your actuals weekly and adjust often based on trends and upcoming expenses.

Poor Cash Flow Management

This might surprise you, but poor cash flow management is the most important reason why 90% of small businesses fail. More businesses fail due to cash flow issues than lack of profits. Wait….how can that be? Because even profitable businesses can run out of money if they don’t manage their cash flow well.

Let’s say you land a big client. Amazing, right? But what if they take 90 days to pay? Meanwhile, your bills, salaries, and inventory costs don’t wait.

If you don’t have cash on hand to float your expenses, you’ll be forced to borrow, delay payments, or miss payroll. That’s the kind of pressure that leads to burnout or worse, closure. Cash flow is the main factor of your business. Track how to avoid cash flow issues in your business and prevent it from failing, and monitor cash flow weekly. Set up clear payment terms with clients (Net 15 or Net 30). You can create a buffer fund for at least 2-3 months of operating costs.

Not Planning for Backups 

Have you ever wondered, What happens if your biggest customer leaves? Or if your supplier raises prices overnight? If 2020 taught you anything, it’s that a business can change overnight.

Whether it’s a pandemic, an economic shift, or a key client canceling, surprises will hit your business. If you don’t have a financial cushion, you’ll struggle to survive the impact. And surprisingly, only 25% of small businesses have enough cash to cover 60 days of expenses.

What you can do for your backup plan is to save 10% of your profits monthly in an emergency fund. Review your “worst-case” scenarios and prepare for them. Avoid relying 100% on one client or income stream.

Quite helpful, right? So, many successful-looking ventures crumble just because they didn’t have a Plan B, or even a Plan A that accounted for reality.

Not Having a Qualified Finance Expert

You might think you’re saving money by doing your own bookkeeping. After all, QuickBooks looks simple enough, right?

But without a solid understanding of tax rules, deductions, payroll, and reporting, you might end up paying more in penalties and missed tax breaks. You’ll wish you had a professional by your side. So, hiring a qualified accountant isn’t just an expense, it’s an investment in the longevity and legality of your business.

Accountants don’t just file taxes. They help you plan for taxes ahead of time, spot financial issues before they explode, and save your business from failing. An accountant can guide you on legal deductions, cash flow strategies, and growth planning. 

If your business is earning real money, it’s time to bring in real help. Hire a certified bookkeeper or accountant who can schedule quarterly financial reviews. And the best thing is that he will have expertise with tools such as Xero, FreshBooks, or QuickBooks to maintain the organisation. 

Final Thoughts

Small business failure isn’t always because of bad ideas. Often, it’s just bad money management. Because ideas alone aren’t enough. You need structure, strategy, and support, especially when it comes to money.

The good news? That’s fixable. You don’t need an MBA, just awareness, discipline, and the right support. Want to be among the 10% who make it? Then get serious about your numbers. Take control of your money, protect your business, and build something that lasts.

“Passion fuels your dream, but accounting keeps it alive.”