10 REASONS SMALL BUSINESSES FAIL AND 10 WHY THEY …
10 Reasons Small Businesses Fail and 10 Why They Succeed
by Jay Goltz
|"One of the least understood aspects of entrepreneurship is why small businesses fail, and there's a simple reason for the confusion: Most |
|of the evidence comes from the entrepreneurs themselves. I have had a close-up view of numerous business failures -- including a few |
|start-ups of my own. And from my observation, the reasons for failure cited by the owners are frequently off-point, which kind of makes |
|sense when you think about it. |
| |
|If the owners really knew what they were doing wrong, they might have been able to fix the problem. Often, it's simply a matter of denial or|
|of not knowing what you don't know. In many cases, the customers -- or, I should say, ex-customers -- have a better understanding than the |
|owners of what wasn't working. The usual suspects that the owners tend to blame are the bank, the government, or the idiot partner. Rarely |
|does the owner's finger point at the owner. Of course, there are cases where something out of the owner's control has gone terribly wrong, |
|but |
|I have found those instances to be in the minority. |
| |
|What follows -- based on my own experiences and observations -- are my top 10 reasons small businesses fail. The list is not pretty, it is |
|not simple, and it does not contain any of those usual suspects (although they might come in at Nos. 11, 12 and 13). |
|1. The math just doesn't work. There is not enough demand for the product or service at a price that will produce a profit for the company. |
|This, for example, would include a start-up trying to compete against Best Buy and its economies of scale. |
|2. Owners who cannot get out of their own way. They may be stubborn, risk adverse, conflict adverse -- meaning they need to be liked by |
|everyone (even employees and vendors who can't do their jobs). They may be perfectionist, greedy, self-righteous, paranoid, indignant, or |
|insecure. You get the idea. Sometimes, you can even tell these owners the problem, and they will recognize that you are right -- but |
|continue to make the same mistakes over and over. |
|3. Out-of-control growth. This one might be the saddest of all reasons for failure -- a successful business that is ruined by |
|over-expansion. This would include moving into markets that are not as profitable, experiencing growing pains that damage the business, or |
|borrowing too much money in an attempt to keep growth at a particular rate. Sometimes less is more. |
|4. Poor accounting. You cannot be in control of a business if you don't know what is going on. With bad numbers, or no numbers, a company is|
|flying blind, and it happens all of the time. Why? For one thing, it is a common -- and disastrous -- misconception that an outside |
|accounting firm hired primarily to do the taxes will keep watch over the business. In reality, that is the job of the chief financial |
|officer, one of the many hats an entrepreneur has to wear until a real one is hired. |
|5. Lack of a cash cushion. If we have learned anything from this recession (I know it's "over" but my customers don't seem to have gotten |
|the memo), it's that business is cyclical and that bad things can and will happen over time -- the loss of an important customer or critical|
|employee, the arrival of a new competitor, the filing of a lawsuit. These things can all stress the finances of a company. If that company |
|is already out of cash (and borrowing potential), it may not be able to recover. |
|6. Operational mediocrity. I have never met a business owner who described his or her operation as mediocre. But we can't all be above |
|average. Repeat and referral business is critical for most businesses, as is some degree of marketing (depending on the business). |
|7. Operational inefficiencies. Paying too much for rent, labor, and materials. Now more than ever, the lean companies are at an advantage. |
|Not having the tenacity or stomach to negotiate terms that are reflective of today's economy may leave a company uncompetitive. |
|8. Dysfunctional management. Lack of focus, vision, planning, standards and everything else that goes into good management. Throw fighting |
|partners or unhappy relatives into the mix, and you have a disaster. |
|9. The lack of a succession plan. We're talking nepotism, power struggles, significant players being replaced by people who are in over |
|their heads -- all reasons many family businesses do not make it to the next generation. |
|10. A declining market. Book stores, music stores, printing businesses and many others are dealing with changes in technology, consumer |
|demand, and competition from huge companies with more buying power and advertising dollars. |
|In life, you may have forgiving friends and relatives, but entrepreneurship is rarely forgiving. Eventually, everything shows up in the |
|soup. If people don't like the soup, employees stop working for you, and customers stop doing business with you. And that is why businesses |
|fail. |
Top 10 Reasons for Entrepreneurial Success
I really have only one indulgence. I bought an expensive convertible a few years ago. It is not a midlife crisis car; I would call it a midlife celebration car. It is not red. It was a prerecession purchase.
In any case, I was driving to work one recent morning, sitting at a stoplight when a car pulled up next to me and the young man behind the wheel rolled down his window. He shouted over, “How can I be successful like you?”
I sensed he was serious. I appreciated his moxie, and I wanted to give him a great answer. I also knew that I had between five and 10 seconds for the pearls of wisdom to be hatched and delivered. I didn’t panic. I went with my two favorite standbys: make sure your customers are happy and make sure your employees are with the program. The light changed. He seemed pleased with his stoplight counseling. He thanked me, and we both drove off.
But I started thinking: Is that the best I could do? Did I give him enough to get him on his way? Should I have mentioned the “work hard and follow your passion” mantra? No. He certainly has heard that before. Still, I wished I’d had another chance. I feared this would haunt me forever, or at least until lunch. And then, voila! We were at the next stoplight, and he was again next to me, again with his window and mind open. Rebound. I get another shot!
He told me he was graduating from DePaul University, and he wanted to know what else I had for him. By this point, I’d realized that I couldn’t give him the secret to business success in 10 seconds. That would take at least a minute, but I was not prepared. It is an excellent question that requires some thought. I told him I’d post an answer on this blog. So, to you DePaul graduate with moxie, here is what I believe are the most important success factors in business:
1. Look for opportunities to do something better than just about everyone else.
2. Accept risk as a necessary evil. It makes for much less competition.
3. Act responsibly to customers, employees and vendors.
4. Goals aren’t enough. You need a plan. You need to execute the plan.
5. You need to fix the plan as you go. Learn from your mistakes. Most people don’t.
6. Do not reinvent the wheel. Learn from others — join a business group.
7. Make sure the math works. I know plenty of people who work hard and follow their passion but the math doesn’t work. If the math doesn’t work, neither does the business.
8. Make sure that every employee understands and works toward the mission.
9. There are going to be difficult times and you need to be resilient; whining is a waste of time.
10. There will be sacrifices. Work to find a balance so that you don’t become a financially successful loser. It’s not about the income, it’s about the outcome.
That’s my Top 10 list. I’m sure there are more. What do you think is missing?
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