4 Reasons Why COVID-19 Killed So Many Small Businesses

Upset business owner wearing medical mask and gloves looks over her finances

January 1, 2020 wasn’t too different from any other 1st day of the new year.

We all had high expectations for 2020. The roaring ‘20s (21st-century edition), the start of a new decade, a year full of holidays on Fridays and Saturdays. But then, COVID happened.

It’s been a tough year for us all on many levels. Now that we’re a few months into the “new normal,” we’re coming to grips with some challenging realities. Most small businesses around the globe have experienced big, scary changes. Some have closed their doors entirely, while others seem to have pivoted swiftly and are doing a brisk business.

How have so many been killed off while others prosper? It’s about more than industry and client base. The behind-the-curtains reason why COVID-19 has slain multitudes of small businesses is down to preparedness. A lean-run company can make necessary changes on a dime.

But don’t give up hope if you’ve been walloped! You can use this wake-up call named COVID as an opportunity to grow so when the next disaster strikes, you can come back 10X stronger. Let’s start by covering the four main reasons why COVID-19 has had such a negative impact on small businesses—and what you can do to thrive even during difficult times.

Reason #1: No Emergency Savings

Not having emergency savings is one of the biggest culprits of small business failure in the midst of COVID.

It’s hard to put an exact number on how much you should sock away for a rainy day. For some small businesses, you may need 3 months’ worth of emergency funds. For others, it could be close to a year. It depends on your business, the industry you’re in, and how much inventory you have, how many employees you need, and so on.

Here’s an example. If you’re running a small fintech company that is growing quickly and proving to be successful right off the ground, you may not anticipate a lengthy recovery period after an emergency. The fintech industry is booming, there’s a need for your product, and you have a good track record. In this case, you may feel confident with a 3-month emergency fund.

On the flip side, if you own a small business that has struggled to get off the ground and depends mainly on one or two types of consumers, you’ll want to have a good chunk of change for your just-in-case funds. Why? Your small business isn’t raking in the dough quite yet — and if any emergency impacts your consumers, you’re going to have a hard time getting them to fork out the money you need to stay afloat.

It sounds harsh, but don’t we all need some tough love? Emergencies like COVID will happen from time to time; there’s no way to prevent them. So, if you own a small business, you need to get ahead of the game with an emergency fund.

Reason #2: Unnecessary Expenses for Small Businesses

You don’t have to have an MBA to understand the difference between must-haves and nice-to-haves. And you definitely don’t have to go to business school to realize those nice-to-haves can waste a lot of money. Operating a small business is massively different from running a large one — and one of the biggest differentiators is the amount of money you have in the pipeline, waiting to be used at any time.

COVID-19 and its economic aftermath are presenting us with a big lesson: Don’t pay for things that you don’t need when you don’t have the money to pay for them.

You’d think this would be intuitive for us. “If I don’t need another printer, and I don’t have the money for it, then I’m not going to buy it.” But really, how many times have you countered that with something like: “I don’t NEED another printer, but it would be so helpful. I know money is tight right now, but it will pay off in the long run. We can charge it to the credit card. And hey, it’s a tax deduction.”


Want to know why? Because something like COVID could come around, strangle your revenue, and leave you high and dry for profits. The money spent on those nice-to-haves should be reserved for CYA during unexpected emergencies.

Here are a few tough-love questions small business owners should ask themselves:

  • Is renting an office space a nice-to-have? Many small businesses have recently discovered they don’t need such a large building or don’t need a brick-and-mortar building at all. Imagine that big chunk of change staying in your pocket!
  • Do you have expensive software or systems that are nice to have but not totally necessary? Believe me, I understand how fantastic it is to have a system that organizes my life. But I also see clients paying for programs that have so many bells and whistles that they don’t even use them. They are just too complicated. Yet, they keep shelling out for them. If a system doesn’t give a significant return on my investment, then I kiss it goodbye and stick the savings in my rainy-day fund! (Marie Kondo, anyone??)
  • What products or services are being auto-charged to your PayPal account every stinkin’ month? C’mon, don’t act like you don’t know what I’m talking about. You sign up for a subscription service to a course you never open, a swanky system that you keep telling yourself you’re going to figure out and use. Hey, there’s no shame or blame here! I’ve been there, done that. But now’s your chance to cut that sh*t lose, trim the fat, and sleep easier.

Reason #3: Too Much Tied-up Money

Sometimes, you just need fast cash. I know you’re shaking your head and rolling your eyes, but you know I’m right. Small businesses literally can’t afford to have all of their money tied up in investments or inventory.

Why? Because in the unfortunate cases like COVID-19, where you need money quickly, you’re not able to get it when it’s tied up in investments and inventory. It’s called liquidity.

It means that you have liquid cash on hand that can quickly be used to pay for anything that may pop up — no matter what. The problem is, far too many small businesses get their money tied up in investments and inventory, forgetting that cold-hard cash is essential.

Luckily, the answer is pretty simple. Set a liquidity baseline that you’re comfortable with — and don’t dip past that.

Reason #4: Messy Finances

When you first started your small business, the thought of having messy finances probably felt far-fetched. You were putting your life and soul into this business, so why would you ever let your finances get out of hand, right?

We’ve all been there. We’ve all said it. But truth be told, it’s hard to keep up with it all. It’s like a house. You move into a new home, the excitement is at 100%, you’re cleaning and decorating, and all you can think about is how spotless you’re going to keep your home.

Slowly but surely, the inevitable comes to pass. You leave a sock on the floor. And then you skip your weekly vacuum session. You have a long, stressful week, and you let the clutter build up. Before you know it, your house is a complete wreck, and you have to block out a few hours on your precious Saturday to get your house back in order.

Now, will getting your financial house back in order easy? Maybe not. But will it be worth it? Hell yeah, it will.

Because if you’re…

  • Stressed about money
  • Not tracking your invoices and expenses
  • Late on your payments
  • Overpaying or underpaying employees
  • Spending more than you make
  • Not sure what to do about your taxes
  • Never setting a budget

…then your financial house is a mess. But it doesn’t have to be!

How to Prepare for the Future

We’re wide awake, thanks to COVID-19. Now is the time to make changes to ensure your small business thrives, no matter what comes your way. Here are some ways to stay prepared for future disasters (because we know they’re going to happen, right?):

  • Cut back on spending. I know, I know…you don’t wanna. But trimming back to essentials raises your profit totals so you are earning more per customer. It may take some practice and it may feel uncomfortable at first, but once you start seeing the difference it will make, it will become second-nature.
  • Reexamine how you’re investing. Reason #3 taught us that we shouldn’t be financing too much in the wrong things. Take some time to figure out what the right things may be. One great investment is your people. As a small business, you’ll want to have loyal, skillful, versatile employees who can jump in and work several different parts of your business. Look for these kinds of people and go the extra mile to get them trained or certified in the business’s niche.
  • Have a disaster financial plan and a yearly strategic plan (I repeat, every year, because as we know, things can change fast).
  • Determine the right type of emergency savings fund for your business. As we said, every business is different, so do some research and plan out how many months (or more) you’ll need to be financially prepared for emergencies down the road.
  • Be compassionate and appreciative of your staff—you will need each other during tough times. If you take good care of them, their loyalty will astound you!
  • Streamline your processes and systems. Got a system or software that is costing you unnecessary money? Get rid of it!
  • Always know your numbers. The small businesses that have made it through COVID-19 know their numbers like the back of their hands. You have to know what’s coming in and what’s going out, how your people are doing, and what competitors or ankle-biters may be close on your heels.

And finally, one last tip: When you need to ask for help, ask for it. There’s no shame in seeking financial counsel. And investing in support that provides a massive ROI is just plain smart! Give us a call, and we’ll make getting your financial house in order easy!


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Michelle Cooper

Michelle Cooper is a powerhouse entrepreneur, CEO of Alchemy Accounting & Bookkeeping, author of Confessions of a Money Rock Star, Your MoneyDate Journal, and co-author of the collaborative book, Women Rising. She has helped many business owners climb out of entrepreneurial poverty into the land of profit.