Why Do Small Businesses Fail?

According to the U.S. Small Business Administration the primary reason for business failures are:

1. Inadequate front-end planning.  Most often businesses are mimics of others already in business.  The plan is, if she can do it, so can I.  There’s a notion of duplicating the apparent trappings of the model business without a true understanding of what’s really involved.  There’s no formal business plan. No market study or feasibility evaluation and consequently no cash flow projections.

2. Insufficient capital for start-up and back up.  The lack of sufficient capital cannot be overcome by hard work.  A new business must either be self-funded by the entrepreneur, have a credit resource or investors.  Most businesses underestimate the capital requirements because of insufficient planning.

3. Inexperienced management.  Being great at your job does not mean one will naturally be great at managing it.  Business success devolves to delivering customers a quality product or service, getting paid for doing so and ensuring payments are greater than the cost of delivery.  It’s plain to see that the “job” is actually only one third of the business.  Two thirds are management.  But the great thing about the management skills is they are largely transferrable between businesses.  Managing a flower shop, a construction firm or a law office really have many of the same responsibilities and tasks.  That’s important because finding help and mentorship needn’t be limited exclusively to your chosen field or market.  Any successful business person can offer you loads of very valuable advice and insight.

4. The wrong location.  Location!  Location!  Location!  It’s a bit surprising this point of failure ranks so high.  If your planned business depends on foot traffic, then location is everything.  Of course location is expensive, and that’s the most likely explanation why this failure ranks so high.  Starting out on a shoestring, the entrepreneur scrimps on rent with devastating results.  Your business need not be in the tony part of town, nor directly at the most prominent intersection of your neighborhood, but it must be easy to find.  Can you give short enough directions that they can be remembered without being written down?  Ask a couple friends to drive by your proposed location.  Give them directions one time, over the phone and see if they can easily locate it.  If not, you’ve got trouble.  Your friends are probably more dedicated to you than a potential customer.  Don’t forget parking, traffic congestion, delivery issues, distance to suppliers as well as your travel distances if part of your business is delivery to others or work at other locations.

5. Inventory mismanagement.  Supply chain.  As a small business you’re competing against companies with established just in time supply, and massive distribution centers.  But they can also be resources.  Think of creative ways you can be nimble using those systems.  For example, can paying for overnight shipping on expensive or rarely needed items be a better investment than letting your cash languish on a shelf in unused inventory?

6. Too much capital in fixed assets.  I’m not sure why the SBA identifies this as a separate catagory from number 2.  It’s really the same thing.  More than likely, this is an item small business do anticipate well.  In fact, small businesses tend to over-invest in capital items.  Buying equipment when a rental arrangement is probably more sensible, not from a cash-flow perspective, but from one of maintaining a capital reserve.

7. Poor credit practices. This item repeats number 3.  It’s a management issue.  It’s not that the business takes on too much debt, but rather it extends credit to customers, providing goods and services without a plan for getting paid.  Trust me!  I survived in spite of suffering this failure myself.8. Unplanned expansion.  I lived through this one too.  I was convinced by a young lawyer to hire him.  I really hadn’t planned to expand that way.  He was persistent.  I decided, “why not?”  He can do what I do, and I’ll take a piece of his income.  Big mistake.  I invested in space, equipment, supplies and marketing to make work for him.  He was with me two years.  He learned how to operate a law practice and opened as a competitor less than a mile away.

Recognize that your business may be absolutely dependent on your skills as an entrepreneur.  If you can’t personally manage another location or are crucial to the delivery of product, are you absolutely certain someone else can?  Do you have it down to a science that can be taught to others?  Do you have someone with your level of dedication to you or your business?

9. Having the wrong attitude.  This failure most frequently comes from not recognizing there is so much more to running a business than the actual delivery of products and services.  As an employee, there may be a temptation to think, I can do this myself.  Why am I making my boss rich?  I’m striking out on my own.  That sort of selfish attitude is a recipe for disaster.  Entrepreneurs work harder and longer than any employee.  As a small business owner you must be prepared to live, eat, drink and sleep your work constantly for a remote payoff.

10. Inadequate records and financial knowledge.  The concept of money can be a mystery.  The arcane language and rules of accounting don’t help Throw in the often hidden consequences of taxation and the need for expertise should become apparent.  Sound advice can avoid a number of financial pitfalls: too much credit, over-extension of credit, poor collections, and cash shortages.

11. Unwillingness to employ and work with a banker, accountant and a lawyer.  These are the remedies for failures one through ten.

12. Lack of managerial foresight.  For most small businesses, a staff is only a dream.  At first you’ll be saving nickels and dimes so that you can afford the assistance of professionals and consultants, but as your business grows, the entrepreneur must release and delegate critical tasks.  Honest self-evaluation is crucial.  It may require that you don’t hang onto what you’d like to do, but what you do best, finding others more competent to fill other roles.

© William Hudnall 2011

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