Top 8 Challenges for Small Businesses
Small businesses are the backbone of the U.S. economy, making up 99.9% of all U.S. businesses, according to the Small Business Administration. However, despite their prevalence, the survival rate of these enterprises is alarming, with 21.9% of small businesses failing within the first year and nearly half going out of business within five years. Starting a business, then building, and sustaining business success is hard work.
Thankfully, the challenges facing small businesses are neither mysterious nor overwhelming. To the contrary: almost all small businesses face the same challenges and, with the right planning and preparation (and maybe a helping hand along the way), can conquer these challenges to become one of the few who will thrive far into the future.
Here are the eight most common challenges the typical small firm is likely to encounter and how to overcome them.
1. Too Few Applicants
According to recent surveys, nearly half (47%) of small businesses struggle filling positions. The most common reason? Not enough applicants.
The labor market’s volatility means that while some sectors are shedding jobs, many others (especially in the healthcare, service, retail, and hospitality sectors) are still struggling to find sufficient numbers of workers. The result has been a persistently low unemployment rate (3.8% as of March 2024), making finding new workers challenging.
To address this challenge, small businesses can broaden their recruitment channels, utilizing online job portals, social media, and professional networking sites to access a wider pool of candidates. Recruitment is also an area primed for outsourcing to services like a PEOs that have both domain expertise and pre-existing networks they can leverage on behalf of their small business clients.
2. Poor Worker Quality
According to data platform Statista, outside of inflation, quality of labor is the most important problem facing small businesses in the U.S. For example, candidates might lack appropriate experience or skills (hard or soft), and/or they may be a poor fit for the job role in some other way.
This situation can easily turn into an existential threat. Nearly a quarter (23%) of small business failures can be attributed to not having the right team, according to job posting platform Zippia.
Again, getting outside help can be invaluable, since small business owners often lack the time and expertise to give this function its due. From there, investing in comprehensive training programs and continuous professional development can enhance employee skills and align their capabilities with the business’s needs.
3. High Labor Costs
Labor costs can be disproportionately high for small businesses. On average, companies spend 70% of their operating expenses on employee wages and bonuses, and cost of labor is a factor in 8% of business failures.
The challenge is that small businesses face a sort of ‘reverse economy of scale’ problem: they may have fewer employees, but as a proportion of total revenues, labor expenses are higher than for larger companies. That’s because small businesses usually have fewer revenue streams and lower overall revenue, making any fixed cost, like payroll, a larger slice of the pie. Right-sizing not just their workforce but also their labor expense is critical.
This is one of the hardest challenges facing small businesses to overcome, and it’s a key reason why each member of a smaller team usually ends up wearing multiple hats. It’s key to optimize staffing levels and to manage payroll as efficiently as possible. One other thing that can help is access to economy of scale pricing where possible. A PEO, for example, is one of the only ways small firms can access cost-efficient Large Group Health Plans.
4. Owner Burnout
A related—and underappreciated—challenge for small businesses: owners who overdo it. A Walmart Business survey found that nearly two-thirds (62%) of small business owners experience burnout regularly. "Sometimes there is so much work to do it is hard to accomplish it all as one person,” one survey respondent said. Certainly, small business owners often have to do a little bit of everything, but this approach can risk the health of both the owner and the business.
Improved/additional hiring and increased delegation of tasks is critical. If nothing else, consider part-time or freelance support to alleviate the burden on the owner. A good rule of thumb is that business owners should be able to spend most of their time and energy focused on strategic growth. Administrative tasks are usually best left to staff or service providers.
5. Loss of Focus
Closely related to the previous challenge, business owners who do (or must) handle every aspect of the business, especially non-revenue-generating tasks like HR, can lead to a loss of focus on core activities. As a result, not only does the business leader risk burnout, but they also put their company’s future growth and revenues on the line. According to one report, small businesses spend 120 days a year—nearly half of the typical 260 working days in a year—on administrative tasks.
Yes, administrative work is critical, but it is also time-consuming and non-revenue-producing. Here, the answer is simple: either hire people to handle these tasks, or outsource administrative work, to free up time for the owner to concentrate on business development and revenue generation.
6. Government Regulations
Navigating the maze of government regulations, especially in HR, can be daunting and time-consuming. This is another area where small businesses are disproportionately impacted.
“The cost of regulatory compliance can be a problem for small businesses because most of them don’t have enough capital to pay for all necessary expenses associated with compliance, such as equipment upgrades, additional training, and employee wages,” writes federal contracting news site ExecutiveGov.com. They cite a study that found small businesses with fewer than 20 employees typically spent $10,585 on certain regulatory compliance activities, versus $7,755 for businesses with more than 499 employees for the same compliance activities.
Employing an HR professional or outsourcing HR tasks with a PEO can assist with regulatory compliance, reducing the risk of penalties.
7. Cost and Availability of Insurance
Competing with large corporations in terms of employee benefits is another challenge for small businesses. And offering top-tier benefits really is crucial: if you want the best workers, you must be able to compete with enterprise-sized organizations and the cornucopia of benefits they can offer. Realistically, the only way to offer enterprise-grade benefits is to go through something like a PEO that can leverage economy-of-scale pricing on behalf of small business owners.
8. Cash Flow Management
Positive cash flow is crucial for the survival of any business; and insufficient cash flow is the #1 cause of small business failure, playing a role in 82% of business failures, according to Zippia. For new businesses, or those dependent on a relatively small customer base, unpredictable revenues and expenses can play havoc on cash flow.
This issue can turn existential when costs increase faster than revenues. That’s a not uncommon situation: a report from Verizon found that four out of five businesses were facing increased costs even as half (46%) reported declining sales.
This is another challenge that can be legitimately very challenging to address. Employing automated tools for financial management and forecasting can help businesses plan better and manage cash flow more effectively. Ultimately, however, this is an issue related to strategy and business management. Having a well-designed, well-executed business plan and strategy should help protect against cash flow woes.
In the end, while small businesses face numerous challenges, strategic use of resources such as HR outsourcing can significantly mitigate these issues. Outsourcing not only helps manage costs but also improves compliance, employee management, and operational efficiency, allowing business owners to focus on core activities and strategic growth.
Ready to optimize your HR operations and boost business productivity? Consider partnering with CoAdvantage, a nationwide Professional Employer Organization (PEO). With our comprehensive and cost-effective HR solutions, including but not limited to: HR administration, HR technology, workers' compensation management, and tailored health insurance packages. From payroll taxes to compliance and risk management, we've got you covered.
Let us handle the complexities of HR management so you can focus in growing your business. Fill out the form below to discover how CoAdvantage can support your company's success!