Small businesses often face a variety of problems, some of which are related to their size. A frequent cause of bankruptcy is under capitalization. This is often a result of poor planning rather than economic conditions. It is a common “rule of thumb” that the entrepreneur should have access to a sum of money at least equal to the projected revenue for the first year of business in addition to his or her anticipated expenses.

For example, if the prospective owner thinks that he or she will generate $100,000 in revenues in the first year with $150,000 in start-up expenses, then he or she should have not less than $250,000 available. Failure to provide this level of funding for the company could leave the owner liable for all of the company’s debt should he or she end up in bankruptcy court, under the theory of under Capitalization.

In addition to ensuring that the business has enough capital, the small business owner must also be mindful of contribution margin (sales minus variable costs). To break even, the business must be able to reach a level of sales where the contribution margin equals fixed costs. When they first start out, many small business owners under-price their products to a point where even at their maximum capacity, it would be impossible to break even. Cost controls or price increases often resolve this problem.

In the United States, some of the largest concerns of small business owners are insurance costs (such as liability and health), rising energy costs, taxes, and tax compliance. In the United Kingdom and Australia, small business owners tend to be more’concerned with excessive governmental red tape.

Contracting fraud has been an ongoing problem for small businesses in the United States. Small businesses are legally obligated to receive a fair portion (23 percent) of the total value of all the government’s prime contracts as mandated by the Small Business Act of 1953. Since 2002, a series of federal investigations have found fraud, abuse, loopholes, and a lack of oversight in federal small business contracting, which has led to the diversion of billions of dollars in small business contracts to large corporations.

Another problem for many small businesses is termed the ‘Entrepreneurial Myth’ or E-Myth. The mythic assumption is that an expert in a given technical field will also, be expert at running that kind of business. Additional business management skills are needed to keep a business running smoothly. Some of this misunderstanding arises from the failure to distinguish between small business managers as entrepreneurs or capitalists. While nearly all owner-managers of small firms are obliged to assume the role of capitalist, only a minority will act as entrepreneur. The line between an owner- manager and an entrepreneur can be defined by whether or not their business is growth oriented. In general, small business owners are primarily focused on surviving rather than growing; therefore, not experiencing the five stages of the corporate life cycle (birth, growth, maturity, revival, and decline) like an entrepreneur would.

Another problem for many small businesses is the capacity of much larger businesses to influence or sometimes determine their chances for success. Business networking and social media has been used as a major tool by small businesses in the UK, but most of them just use a “scatter-gun” approach in a desperate attempt to exploit the market which is not that successful. Over half of small firms lack a business plan, a tool that is considered one of the most important factors for a venture’s success.

Business planning is associated with improved growth prospects. Funders and investors usually require a business plan. A plan also serves as a strategic planning document for owners and CEOs, which can be used as a “bible” for decision-making An international trade survey indicated that the British share of businesses which are exporting rose from 32% in 2012 to 39% in 2013.

Although this may seem positive, in reality the growth is slow, as small business owners shy away from exporting due to actual and perceived barriers. Learning the basics of a foreign language could be the solution to open doors to new trade markets, it is a reality that not all foreign business partners speak English. China is stated to grow by 7.6% in 2013 and still sadly 95% of business owners who want to export to China have no desire and no knowledge to » learn their local language.

Bankruptcy: When small business fails, the owner may file for bankruptcy. In most cases, this can be handled through a personal bankruptcy filing. Corporations can file bankruptcy, but if .it is out of business and valuable corporate assets are likely to be repossessed by secured creditors, there is little advantage to going to the expense of a corporate bankruptcy. Many states offer exemptions for small business assets so they can continue to operate during and after personal bankruptcy.

However, corporate assets are normally not exempt; hence, it may be more difficult to continue operating an incorporated business if the owner files bankruptcy. Researchers have examined small business failures in some depth, with attempts to model the predictability of failure.

Social responsibility: Small businesses can encounter several problems, related to engaging in corporate social responsibility, due to characteristics inherent in their size. Owners of small businesses often participate heavily in the day-to-day operations of their companies. This results in a lack of time for the owner to coordinate socially responsible efforts, such as supporting local charities or not-for-profit activities.

Additionally, a small business owner’s expertise often falls outside the realm of socially responsible practices, which contribute to a lack of participation. Small businesses also face a form of peer pressure from larger forces in their respective industries, making it difficult to oppose and work against industry expectations.

Furthermore, small businesses undergo stress from shareholder expectations. Because small businesses have more personal .relationships with their patrons and local shareholders, they must also be prepared to withstand closer scrutiny if they want to share in the benefits of committing to socially responsible practices or not.

Job quality: While small businesses employ over half the workforce in the US and have been established as a main driving force behind job creation, the quality of the jobs these businesses create has been called into question. Small businesses generally employ individuals from the Secondary labour market. As a result, in the U.S., wages are 49% higher for employees of large firms. Additionally, many small businesses struggle or are unable to provide employees with benefits they would be given at larger firms. Research from the U.S. Small Business Administration indicates that employees of large firms are 17% more likely to receive benefits including salary, paid leave, paid holidays, bonuses, insurance, and retirement plans.

Both lower wages and fewer benefits combine to create a job turnover rate among U.S. small businesses that is three times higher than large firms. Employees of small businesses also must adapt to the higher failure rate of small firms, which means that they are more likely to lose their job due to the firm going under. In the U.S. 69% of small businesses last at least two years, but this percentage drops to 51% for firms reaching five years in operation.

The U.S. Small Business Administration counts companies with as much as $35.5 million in sales and 1,500 employees as “small businesses”, depending on the industry. Outside government, companies with less than $7 million in sales and fewer than five hundred employees are widely considered ’small businesses.