The signs and causes of a struggling small business and how to get back on track

Most, if not all, entrepreneurs will face challenging and uncertain times during their business journey — when things aren’t going to plan and it’s difficult to know which way to turn.

The good news is that there are ways to get back on to a road of growth and success.

Here are some quick links to take you to the relevant sections:

What are the signs of a struggling small business?

What are the main reasons businesses struggle?

What are the features of a bad industry?

What to do if your business is struggling

First though, you need to diagnose any problems thoroughly so you can understand what’s happening and take the right steps to get moving in the right direction.

What are the signs of a struggling small business?

It’s good to understand, first of all, what’s going on. Here are the key signs of a struggling company.

Falling or stalling revenue

This is probably the most obvious sign that your business is facing difficulties.

If your company is consistently earning less than it did in the past, or if revenue isn’t really growing, it’s a sign something’s wrong.

Falling profitability

If your profits are falling, this is another indication that there’s a problem.

When your costs are rising and your sales can’t keep up, your profit margins will be squeezed. This is likely also to have a negative impact on your cash flow — the lifeblood of your company.

Falling market share

This can go hand-in-hand with lower revenue and would indicate you’re falling behind your competitors.

Lower customer satisfaction

If your customers aren’t satisfied with your product or service it means your company is not meeting their needs.

You’ll see this through a fall in repeat business (higher customer churn) along with fewer positive testimonials (or an increase in negatives ones) and fewer referrals.

Unhappy employees and/or high staff turnover

If there is persistent grumbling among your staff or they start leaving (especially those you value), this is another warning signal.

It could indicate various problems — poor management, dissatisfaction with pay or prospects, unappealing work environment, etc — but whatever it is, it will cost you in lower productivity. And if you have to replace people, you’ll also face extra hiring and training costs.

Rising debt

If your company needs to take on extra debt to fund (non-growth) operations, you may not be generating enough cashflow to cover your expenses.

Of course, now you’ve acknowledged the signs that your business is facing difficulties, you then need to look at what’s behind those problems.

What are the main reasons businesses struggle?

There are various reasons that lead to roadblocks for businesses. Here are some of the main company-specific ones. Wider market issues will be covered in the sections after this one.

Insufficient market research

If you don’t have a clear understanding of the needs and dynamics of the market you’re targeting, your business is likely to struggle to develop and position the types of products or services potential customers will be willing to pay for.

Lack of a unique selling point (USP)

Your business needs to offer products or services that are distinct from those of your competitors. Specifically, what you offer should be recognised by your customer as a solution to their problem(s). That is your USP.

If you will fail to deliver this, you won’t stand out in the market and your business will likely struggle.

Increased competition

In highly competitive industries, it can be difficult to gain market share. This is especially the case for start-up or small businesses where large businesses (with more spending power) dominate the market.

Poor leadership

Poor management can lead to numerous issues. Weak managers tend to make bad decisions, fail to create proper working practices and don’t communicate effectively.

The result is often low employee morale, a decline in productivity and a negative hit to profits.

Inadequate marketing

If you don’t have a strong marketing strategy, you will fail to attract new customers. Or even retain existing ones.

Markets are competitive and so it is important to promote your business in a way that will make it stand out from the competition.

Inability to adapt

Market conditions are constantly evolving. When businesses fail to keep up or don’t adapt to changes, they can struggle to remain relevant and competitive. This, in turn, can lead to an erosion of revenue and profits.

Lack of funding

This is often one of the biggest challenges faced certainly by small businesses (and especially as they seek to grow).

Without access to sufficient capital, companies will struggle to meet their running costs, e.g. paying employees, buying supplies, covering overheads and spending on marketing.

Poor cashflow management

Companies need enough cash on hand to pay their bills on time and respond to unexpected expenses or emergencies. If you don’t have an effective cashflow strategy you could run into problems. It may also prevent you from investing in future growth.

And it’s always worth remembering that profit does not equal cashflow. You can be generating a profit but losing cash. It’s important you understand the difference.

Macroeconomic factors

All businesses can be affected by changes in the broader economic environment. For example, when there’s an economic slowdown or recession, higher inflation or higher interest rates. This can all lead to changes in market demand.

Poor physical location and/or online presence

Depending on the type of industry, where a business is located physically can play a critical role in its success or failure. This is especially relevant for retail and hospitality companies that rely on visibility and footfall.

If your target customers can’t find you, they’ll take their business elsewhere.

This also applies to companies that operate exclusively online. If your SEO (search engine optimisation) is weak, you will not be difficult for customers to find when they’re searching online.

Similarly, if you have a website that is slow and/or not user-friendly, customers may not stick around long enough to engage with what you have to offer.

Growing too fast

While most entrepreneurs want to grow their businesses, the pace at which they do this must be managed effectively. Growth requires focus and a draw on resources.

Expanding too rapidly can stretch your staff and finances too thinly. And it can dilute management focus. You need enough time and money if you want to grow your company successfully.

Legal or regulatory issues

Businesses are required to operate within the confines of the law and industry regulation.

Disputes — such as failing to protect customer data, infringing copyright or making false claims — can be expensive and may damage your company’s reputation.

However, not all problems are company specific. Some of the problems you face could be external and due to market forces. We’ll tackle some of them here.

What are the features of a bad industry?

Here are some examples of what makes an industry difficult to compete in.

1. High competition

When industries are highly competitive, it can be difficult for a business to stand out and succeed. In some cases, it can lead to price wars and margin pressure.

Defining the competitiveness of a market depends on various factors. Here are some examples of highly competitive industries:

Market concentration

Some markets are characterised by a few dominant players with significant market share. If these companies are well established, i.e. they are well known, well-funded and have a solid customer base, it can be difficult for new entrants to gain traction.

Low barriers to entry

If it’s relatively easy for new businesses to enter an industry without much capital investment, specialist knowledge or where there’s little or no regulation, the market can get crowded. This can lead to lots of competition for the same customers which can make it difficult to acquire and retain market share.

Price pressure

In industries where there is intense price competition, margins often get squeezed. And if businesses struggle to differentiate themselves on factors other than price, it can be a sign that the market is saturated.

High customer churn

Customers frequently switching between competitors and showing little brand loyalty is another sign of a highly competitive market. When customers have numerous options and low switching costs, it can be difficult for companies to retain their customer base.

Stagnant growth

If industry growth has slowed or stalled, it could indicate that competition in the market is saturated. When there are limited market expansion opportunities and a high number of competitors, it can be difficult for individual businesses to get ahead.

Limited market segments

If the industry has a limited number of distinct market segments and each segment is already served by multiple competitors, competition is likely to be high. Again, businesses can be left fighting for a share of the same customer base.

2. Limited customer demand

An industry with limited customer demand can be challenging for businesses. If there are only a small number of potential customers for a product or service, it can be difficult to generate enough revenue.

Here are some of the signs that suggest an industry has low customer growth. You’ll notice that there are some similarities here with a highly competitive market.

Slow sales growth or declining sales

If businesses in an industry consistently experience sluggish or declining sales over a prolonged period, it may indicate that customer demand is low. Customers need sufficient interest and motivation to purchase.

High customer churn or low customer retention

As mentioned above, customers may be switching to competitors. Alternatively, they may be abandoning the industry altogether.

Little or no customer engagement

Businesses can struggle to engage with customers when industry demand is low. In this case, customers will provide less feedback, fewer reviews and show less interest in participating in industry-related events or communities.

Limited customer inquiries or leads

When businesses in an industry struggle to generate inquiries, requests for quotes or leads, it could be a sign that the market lacks customer demand.

3. High regulatory or legal barriers

An industry that is heavily regulated or has high legal barriers to entry can be difficult for new businesses that want to get a foothold. This can limit competition and customer choice. Of course, companies that are already established in the industry may be quite happy about that).

Here are some examples of how industries can be tightly regulated and how this makes barriers to entry high:

Extensive licensing and certification requirements

If an industry requires businesses to obtain numerous licences, permits or approvals from government authorities or regulatory bodies, it suggests high regulatory barriers. For example, the aerospace or aviation industries.

These requirements can be rigorous, time-consuming and expensive and could dissuade new competitors from entering the market.

Compliance complexity

Industries with high regulatory barriers often have complex compliance frameworks — such as the financial services industry.

This can create situations for businesses where they have to navigate multiple regulations, standards and reporting requirements. This creates complexity for new market entrants.

Stringent quality and safety standards

Some industries are required to prioritise consumer safety (e.g. the pharmaceutical or water treatment sectors).

This creates high regulatory barriers to entry as companies will need to demonstrate compliance with rigorous testing, inspections and ongoing monitoring.

Restricted market access or geographic limitations

Companies may also face industry restrictions on market access. There may only be a limited number of available permits (e.g. the casino sector) or specific geographic limitations (e.g. the cannabis industry is legalised only in restricted states and provinces).

This, again, creates high regulatory barriers to entry and makes it difficult for companies to expand into new markets or operate in certain regions.

Compliance costs add to financial burdens

High regulatory and compliance requirements also tend to lead to higher costs. For example, companies may need to pay for licensing fees, legal counsel, insurance, expert advice, safety and security equipment, etc.

This extra demand on capital can also act as a barrier to entry.

4. Technological disruption

If an industry is changing rapidly because of technological advancements, it can be difficult for businesses to keep up. It can also create added costs.

Here are some of the signs that suggest an industry is facing technological upheaval.

Emergence of innovative start-ups

Disruptive start-ups can introduce new technologies, business models or a different approach.

This could include leveraging emerging technologies, such as artificial intelligence, blockchain or the Internet of Things to offer innovative solutions that challenge traditional players.

Rapid technological advancements

Some industries are witnesses fast-moving changes in technology which could have the potential to disrupt existing business models.

Progress continues to be made in automation, digitalisation, data analytics, robotics, biotechnology, etc. This, in turn, can create new opportunities and threats within an industry.

Changing consumer behaviour

Customers may switch to new technologies, platforms or channels that reshape their preferences or change their buying patterns. For example, the rise of e-commerce has transformed the retail sector. Similarly, streaming services have disrupted the entertainment industry.

To be successful, companies need to adapt to evolving customer demands.

Shift in power dynamics

Incumbent players may face increasing competition from non-traditional sources which enter the industry with disruptive offerings, e.g. the tech giants or start-ups. For example, Apple Pay or Klarna have become alternative payment methods and are challenging traditional credit or debit card payment systems.

This can unsettle established players and force them to re-evaluate their strategies.

Changing skill requirements

Companies facing technology disruption may need either to re-skill their existing workforce or hire additional, qualified staff. This will add to costs and can raise barriers to entry.

5. Volatile market conditions

An industry that is subject to significant market fluctuations can be difficult for companies to navigate. Uncertainty can make it difficult to plan for the future which makes strategic decision-making harder.

Here are some of the signs of industries that face volatile market conditions as well as examples of sectors that typically face such circumstances:

Price instability

Volatile industries are often subject to frequent and significant price fluctuations. These can be driven by a variety of reasons including changing consumer demand, shifts in supply and demand dynamics, geopolitical events, economic conditions or regulatory changes.

The commodity industries, such as energy, mining, agriculture, etc are examples here.

Intense competitive pressure

When multiple players are vying for market share, they may opt for aggressive tactics to gain an edge, such as price competition. This high level of competition can lead to market volatility as companies attempt to differentiate themselves and fight for customers.

The retail and automotive industries are examples here.

Rapid technological advancements

Technological advancements or disruptive innovations can cause industry dynamics to shift rapidly.

When industries rely heavily on technology or are subject to digital disruption, they may face intense market fluctuations as new technologies are introduced. In extreme cases, this can render existing products or business models obsolete.

As an example — in early 2000, Blockbuster Video rejected a US$50m offer to acquire Netflix (which was then a start-up). Blockbuster struggled throughout the 2000s and filed for bankruptcy in 2010.

Regulatory uncertainty and geo-politics

When industries face changes in laws, policies or regulations, it can significantly impact their operating environment. It can also affect market dynamics, profitability and market entry barriers.

Similarly trade agreements or geo-political instability can introduce unpredictability and disrupt business operations, supply chains or market access.

Examples here would be the pharmaceutical, commodity, tourism and travel industries.

Fluctuating demand patterns

Industries that are faced with significant demand fluctuations can find it difficult to forecast and plan.

This type of volatility can be influenced by factors such as changing consumer preferences, economic cycles, seasonal variations or emerging market trends.

It is important for businesses in these sectors to adapt their strategies and operations to accommodate these shifting demand patterns.

The fashion and apparel industry is a typical example here. Another is the food sector, such as ice cream (where demand falls in the winter) and the growth in meat alternatives (as veganism and vegetarianism has become more common in some markets).

Financial market volatility

The financial markets are subject to fluctuations because of changes in interest rates, currency exchange rates, stock valuations or credit conditions. These can have a direct impact on industries exposed to these markets.

Examples would include broking, banking, asset management and insurance.

6. Limited access to capital

Companies can face challenges if they operate in industries that struggle to access capital and financing options. This can make it difficult for them to invest in growth or make necessary improvements in their operations.

The reason mostly comes down to risk perception, capital intensity and market dynamics. Financing can also be limited, generally, during times of economic uncertainty. Here are some examples:

Start-ups, early-stage ventures and small businesses

When companies are innovative or unproven, they may face difficulty accessing capital.

Similarly small and medium-sized enterprises (SMEs) may encounter challenges when trying to raise finance, particularly traditional bank loans. This is often because SMEs can be viewed as riskier borrowers due to their limited track record, lack of collateral or higher perceived credit risk.

Emerging markets

Industries that operate in emerging markets or developing countries tend to face higher risk of political instability, weaker legal frameworks, increased currency risk and underdeveloped financial markets.

This can limit investor and lender appetite and thus availability of capital.

Creative and cultural industries

Industries related to arts, culture, media or creative endeavours may struggle to access capital because they can be difficult to value. Often, financing options in these industries tends to lean on specialised funding sources or alternative approaches, e.g. grants.

Rural or provincial areas

Areas that are less economically vibrant can often face specific challenges, such as a lack of infrastructure, limited market size or resource (e.g. staff) availability. This can make it difficult to raise finance.

7. Fragmented market

An industry that is highly fragmented, with many small competitors and no dominant players, can make it difficult for businesses to establish a strong market position.

There are various reasons why some industries are fragmented. Here are some examples:

Low barriers to entry

Industries with low barriers to entry make it easier for new players to establish businesses and compete in the market. This leads to more small and medium-sized companies rather than a few dominant players. Low entry barriers can result from factors such as low initial capital requirements, minimal regulatory hurdles or easily accessible technology and resources.

Diverse customer needs

When customers in an industry have broad preferences, demands or specialised needs, this can create opportunities for small business to cater to specific segments. In turn, this can lead to a fragmented market landscape.

Technological advancements

Advances in technology and innovation can lead to industry fragmentation as it can help smaller players to enter the market and compete effectively (provided costs are not prohibitive).

Fragmented supply chains

Industries with numerous suppliers and intermediaries can exhibit fragmentation. This is usually the case if each player in the supply chain focuses on a specific aspect or niche.

Local regulations or specific market structures

Fragmentation is also seen in industries that face complex or region-specific regulations (e.g. particular licensing requirements). This can create compliance complexities and create challenges for consolidation or the emergence of dominant players.

8. High fixed costs

Operating in an industry with high fixed costs can present challenges to businesses. This is because companies with high fixed costs typically have significant upfront investments for the infrastructure, equipment or assets they need to operate.

Examples of this type of industry include airlines, manufacturing, utilities, telecoms, pharmaceuticals, etc.

Here are some of the reasons for the additional challenges these companies face:

Capital intensity

Companies operating in industries with high fixed costs tend to need significant upfront investment. This can be for assets, infrastructure, specialised equipment or expensive staff.

Acquiring and maintaining these costly resources can put strain on a company's financial resources, especially for small or new businesses with limited access to capital.

Break-even point and profitability

Businesses with high fixed costs need to generate a high level of revenue to cover their expenses and reach break-even. This is before they’ve generated any profits.

Cost structure and operating efficiency

In industries with high fixed costs, businesses need to carefully manage their cost structures if they want to maintain profitability.

Even small fluctuations in sales or market conditions can have a significant impact on the bottom line. Operating efficiently, optimising capacity utilisation and controlling variable costs can be crucial for companies that need to offset the impact of their fixed costs.

Risk of under-utilisation

When customer demand falls below expectations, high cost industries can be left with under-utilised assets (with associated costs).

This inefficiency can negatively impact profitability.

Limited flexibility and agility

Industries with high fixed costs often have less flexibility if they want to respond to changing market conditions, customer demands or changes in technology. This is because adjusting their operations or reallocating resources can take significant time and investment.

For this reason, it can be difficult to adapt quickly to industry trends, competitive threats or shifts in customer preferences.

Competitive pressure

High fixed costs can act as a barrier to entry which may lead to a smaller number of dominant players in the industry.

This can make it difficult for smaller businesses to compete with established competitors (that benefit from scale and potential cost advantages).

Long payback period

When companies invest in high fixed costs, the payback period can be lengthy. It may take years to recoup the initial capital costs before profits are earned.

This long payback period increases the financial risk and the time required to achieve a return on investment.

What to do if your business is struggling

Now that you’ve identified some of the micro and macro reasons why your business is facing challenges, the next stage is to find ways to address the problem.

Of course, each company’s journey and set of challenges are unique so there’s no one-size-fits-all approach.

However, here are some steps you can consider to help you get started and (hopefully) turn things around.

Focus on Core Competencies

Every business should understand its core strengths and competitive advantages.

You need to concentrate your resources and efforts on the areas that play to your strengths, differentiate your business and provide value to customers.

If you focus on this, i.e. you streamline your offerings and eliminate non-core activities that drain resources, you’ll be on the right path to success.

Conduct a comprehensive assessment

If your business has difficulties, you should conduct a thorough evaluation of its financial health, operational performance, market position and competitive landscape.

You should use this information to identify the root causes of the particular struggles your company faces so you can target areas for strategic improvement.

Refine your strategy and business plan

Your overall business strategy always needs to be aligned with current market conditions and your goals. You should review them regularly and make adjustments to keep them relevant.

If you’ve identified areas for improvement, you should develop a clear roadmap for moving forward — based on realistic objectives.

Analyse and adjust your finances

You should examine your financial performance with a particular focus on cash flow and expenses to identify opportunities for cost reduction and revenue enhancement.

For example, you may be able to renegotiate contracts with better terms, optimise inventory management or explore new pricing strategies that could improve your company’s profitability.

Enhance customer experience

It’s important that you stay close to your customer so you can ensure their satisfaction and loyalty.

You should collect and listen to customer feedback so you understand their needs and can make the most effective adjustments to your products or services.

Investing in customer service, personalised marketing and building long-term relationships with your clientele can pay dividends.

Consider new markets or segments

If your company’s growth has stalled (because the market offers limited upside), it may be worth exploring opportunities in new markets or customer segments.

You should consider untapped opportunities or niche markets where your products or services can thrive. To do this you should undertake thorough market research. You’ll also need to develop targeted marketing strategies to reach these new audiences effectively.

Embrace innovation and technology

It’s important to stay on top of the industry trends and technological advancements that can benefit your business.

You should explore ways to leverage innovation, automation and digitalisation to improve efficiency, reduce costs and enhance your competitive edge.

Collaborate and seek partnerships

You may be able to expand your market reach through strategic partnerships or collaborations with other, complementary businesses.

This pooling of resources, knowledge and networks could help provide mutually-beneficial opportunities for growth and increased market share.

Invest in marketing and promotion

Is your marketing strategy comprehensive enough to attract new customers and retain existing ones?

You need to get the balance right between online and offline marketing channels, social media, content marketing and targeted advertising to reach and appeal to your target audience.

Seek professional guidance

Not all entrepreneurs, or their management teams, are business strategists. This is especially the case for small businesses.

In this instance, it can be a good idea to seek advice from a small business advisor or a small business coach. An expert industry consultant could contribute too if you want to refine your overall business strategy. If the main area you want to work on is how you market your product or service, engaging a business marketing strategist could be a smart move. Outside advisors who bring an objective and fresh perspective to bear can provide valuable insights and guidance.

Advisors like these can help you identify blind spots, offer strategic recommendations and provide support during challenging times.

Again, each struggling business has unique circumstances, so it's important to tailor strategies to your specific situation.

If you are open to change, willing to adapt quickly and ready to make choices, you can position your business for recovery and long-term success.