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Seven Reasons Small Business Fail and How To Avoid Them

You start your business for the wrong reasons.

I’ve never taken the time to survey small business owners to find out why they started their own business and I would venture a guess to say they would all have unique answers in their own way. If you are thinking that you want to start a business just to make more money that may not be enough of a reason to get you through the tough and lean times. If you are thinking of doing it to spend more time with your family, if you are going to “make it” you may find that your time is just one of the many sacrifices you are going to have to make in order to get your business to succeed.

So what is a good reason? Businesses that succeed provide a product or service that people genuinely want or need, and in exchange the customers are willing to pay for the product or service. It’s a win win situation. The customer gets what they want and you the business owner get what you want, a successful business. The stronger the want or need the more successful the business.

Poor Management

I read reports on business failures and many of them cite poor management as the number one reason for failure. I’d like to say that much of this is crap because we have all recently heard of poor management at every level of business, even the ones that are the most educated, and most experienced in existence, but the truth is I come across new business owners all time that don’t know or choose to ignore a lot of the basics about finance, purchasing, selling, production, and hiring and managing employees. We all have to take the time to do our own personal inventory and honestly evaluate what we do well and what we don’t. You have to take the list of the don’ts and either hire someone who does it well or take the time to get educated. I often use the analogy of an engine when looking at a business, and in this case if you can’t get fuel, and get the fuel into the engine and the tires to turn you got problems. When a business is working well it is the same principle if you want more out of it you should be able to put more fuel in, step on the accelerator and it will make the tires turn faster.

Insufficient Capital

A common fatal mistake for many failed businesses is having insufficient operating funds. Developing a realistic business plan is the first step. I think every small business owner I have met is an eternal optimist both when it comes to cost and revenue projects. I myself should be in the world’s richest club if some of my projections had come to fruition so I am not speaking down to the masses from a lofty position. My recommendation is to take the your best estimate of what you think your cost will be and then create a plan B that includes what you will do if those cost double, and a plan C that include what you will do if they triple. I am a firm believer in that you don’t know what you don’t know, and there will be plenty of unpleasant surprises along the way.

Lack of Planning

It is critical for all businesses to have a business plan, and I don’t necessarily mean a formal business plan from a “business plan kit” or a template that you download but I do mean one that you have take the time to write yourself, and that makes sense to you, and that identifies what you are going to and when are going to do it.

Components may include:

• Description of the business – What are your products and services
• Goals – What do you want to achieve in terms of sales in the year, but more importantly what your goals are per month. The smaller the business the more important monthly numbers are. If your capital is plentiful and/or your cash flow is strong you probably only need to look at quarterly numbers to make sure you are on track, but if you are small it is those monthly numbers that will help pay the bills, pay yourself and keep life from getting more complicated.
• Work force needs - At what point are you going to have to hire someone for your business, and at what point will you be able to afford to hire someone (these two may not always coincide). How many people over the course of the year, and how are you going to handle the complicated parts like payroll, and payroll taxes.
• Financial: In a formal business plan you would need to list capital equipment and supply list, balance sheet, income statement and cash flow analysis, sales and expense forecast, but to keep it simple figure out how much cash and credit you have available, how much your monthly bills will be and how long your existing cash and credit will last if you have no sales. Then take your sales projections and cut them in half, and take your expense projects and double them and then recalculate how long your cash will last.
• Analysis of competition – Knowing your competition is important but it can be an area that I try and guide small business through because while it is important that you know who your competitors are, what they do, and how they do it you don’t want it to become an effort to copy them. Don’t let the analysis influence your thinking about your own products and services. You want to remain unique so your business stands out and the bottom line is you want to be better than your competition in some way. I recently used the analogy of the paper clip industry with a start up that I was talking with. Paper clips all do the same thing but there are companies out there who make colored paper clips, shiny gold color paper clips, plastic paper clips and plain metal paper clips. Some customers just prefer “blue” paper clips if they have the option, so if everyone copied the plain metal paper clip company, customers wouldn’t have the choice, and the company who makes the “blue” paper clips wouldn’t have been able to carve out a niche for themselves.
• Marketing, advertising and promotional activities – If I can say only two things to any small business it is 1) Hope is Not a Strategy and 2) Develop a way to get customers on demand. The first “Hope is Not a “Strategy” means you started and are running your business hoping that customers will understand your product or service and the right people out there in the world will find your offering, understand it and will buy enough of it to keep you in business. A strategy in its simplest definition is a process that lets your business concentrate its limited resources on the greatest opportunities to make sales. A strategy is made up of a message that is easy to understand, that communicates effectively why people should buy your product or service and how you are going to get it in front of the right people. The second “Develop a way to get customers on demand”, no matter what method you choose to use Google CPC ads, online video ads, direct mail, radio advertisements, TV advertisements, trade shows, telemarketing, direct sales calls etc. Going back to my engine analogy, you need to find the ignition switch to start the engine and then the accelerator to make it go faster. Once you know that if you spend a certain amount of money you are going to get a certain amount of sales, it’s a simple math equation from there.
• Budgeting - A budget is a good month to month reminder of what you planned to spend and what you did spend. It is helpful to build the budget in an Excel spreadsheet and have it calculate based on percentage of sales.

Overexpansion

It happens to the best of us. We get a burst of business and confuse the burst with a trend that is going to continue so we start to expand. Slow steady growth is way better and nothing is worse or more painful than to over commit to a new space, or new employees only to find out that you’ve over done it and now you have to find a way to correct it, or worse you find out that you can’t and you may have sunk the ship. At the same time, you do not want to miss sales opportunities from being too cautious. Once you have an established solid customer base and a good cash flow, let your success help you set the right measured pace. In many ways it is like running a long distance race. You don’t want to take off too fast because you will get tired too quick and won’t be able to finish, but you don’t want to go too slow and be further behind that you could have been. The only way to get a handle on it is to take some risk but make sure they are measured and thought through with some form of a fall back plan if it doesn’t work out.

No Website

Simply put, if you have a business today, you need a website. Period. In earlier times it was a telephone, a business card and maybe a fax, but today more and more potential customers are “Googling” to find businesses that provide the products and services they want or need, and then they want more information about them, and when possible they want to make a buying decision right then.

In the U.S. alone, the number of internet users (about 70 percent of the population) and e-commerce sales continue to rise and are expected to increase with each passing year.

At the very least, every business should have a professional looking and well-designed website that enables users to easily find out about their products and services. If you don't have a website, you'll most likely be losing business to those that do. And make sure that website makes your business look good, not bad because in many cases your website may be the first impression potential customers get.

One Secret to Success

One secret to success that is widely shared amongst successful business owners is that “Failure Is Not an Option - Ever! Any setback is only an opportunity to learn and grow. What sets apart those that will make it versus those that fail is their openness to new knowledge and their willingness to learn whatever it takes to succeed.