As many as 75% of all small businesses fail within their first 3 years. I suspect that during the current global recession that this figure has been higher. These are alarming figures and in most cases could have easily been avoided. Over the past 15 years I have coached and mentored almost 400 small to medium sizes business owners and entrepreneurs.About 40% were successful and the extent of my input was to assist them improve their profitability. In the remaining 60% of cases the businesses were a mess and needed to be rescued and made profitable. In my early 20's I had my own business failure. It was a valuable and expensive learning opportunity.
I have identified the following reasons for small business failures (in no particular order):
1. Not heading advice and /or lack of motivation;
2. Drawings exceed what the business can afford;
3. Lack of skilled or incompetent employees (which could include the owner;)
4. No plan and no budget;
5. Underestimating or ignoring the competition;
6. Ineffective or non-existent marketing;
7. Limited or lack of operating capital;
8. Poor location;
9. Key areas of the business not managed;
10. Over extending.
1. Not heading advise and /or lack of motivation
All too often the entrepreneur and owner of the business views it as his/her baby and there is a reluctance to listen to the advice being provided because it would entail change or conflict with their view of the business. In instances they refused to listen, believing that the problems will just go away. In some cases they will agree with the person providing the advice however do nothing when they have left. This may be because they have no confidence that the advice will produce the necessary results/changes, or they have no motivation to make the advice work because they have given up.
2. Drawings exceed what the business can afford
Many new business owners either raid the till removing cash without proper record keeping or draw monies to fund their lifestyles. These withdrawals in many cases exceed what the business can comfortably accommodate. There are instances where the business activity has dropped off reducing the income to the business yet the owner doesn't reduce their withdrawals resulting in additional burden on the cash flow. Generally this reason for failure goes hand-in-hand with other reasons such as lack of control, poor planning or lack of a budget.
3. Lack of skilled or incompetent employees (which could include the owner)
Staff are hired without any knowledge of interviewing process, no reference and background checks, ability to analyze a CV or with a clear job description in mind. This is a recipe for disaster. Even with the very best processes you are never sure about the person you are employing until their first day on the job, however this would reduce your risk or a bad hire. To own and manage a business requires a multidisciplinary skill set. An owner you need to be aware that you are not an expert in every business discipline and that it is okay to acknowledge this. Identify skills that have weakness and then hire-in those skills. There are essential skills that cannot be delegated such as over-all financial control or the ability to read financial statements.
4. No plan and no budget
Without a plan the result will be failure, unless you have a huge amount of luck. As the proverb goes "he who fails to plan, plans to fail." No business can survive without a written plan. Think of it as a road map showing you your point of departure and your point of arrival and the route you are going to take to get there. Occasionally the route (aka plan) needs revision because there is a new road or you change your destination. It is critical that goals are identified. There is little point establishing a business if you have no idea of what you want to achieve. Likewise producing a written budget reduces the risk of financial mismanagement and drawing monies for personal use in excess of what the business can afford.
5. Underestimating or ignoring the competition
I have experienced many business owners who don't know who their competitors are let alone what they are up to until it's too late and their customers have all migrated to the competitor. A key to success is to know your competitors, both direct and in-direct, what their strengths and weaknesses are and what you should be doing to counter their strategies. Its a good idea to visit and even shop at your competitors. See for yourself exactly what customers experience when they visit your opposition. A point to note: many businesses compete solely on price and end up getting into a discount war with their competitors. This very seldom benefits anyone in the medium to long term. Rather consider the points that make you different (USP's (Unique Selling Propositions)) and market those strengths.
6. Ineffective or non-existent marketing
Many small businesses fail because they do no marketing and advertising, or their efforts are ineffective. This point is coupled with a lack of skill or knowledge. Advertising in particular is tough to get right. You need to understand exactly who your customers are so that you can find the right medium to use. Decisions need to be made to use above-the-line or below-the-line media. A note about promotions: there is little point implementing a promotion for the sake of having a promotion. You need to have an objective (a goal like grow sales by 5%), a budget, and some means to measure the success or failure of the promotion. In times of trouble businesses cut their marketing and advertising budgets. It is in these times that they should be maintain or even increased their marketing and advertising spend.
7. Limited or lack of operating capital
This is probably the most obvious reason why businesses fail. However this is the likely end result when the other reasons listed are either not implemented or resolved. There are a few scenarios, the first of which is underestimation of the capital required to operate the business after the doors open for trade and then the realisation that there is no opportunity to acquire further capital as all collateral has been utilized. Many owners assume that their operating capital requirements will be satisfied by the income generated from month one. Rather plan to have sufficient operating capital to cover costs (such as rent and salaries) for at least 6 months. Other scenarios include business trading environment changes were costs are not reduced accordingly; or expansion removes cash from the business; or cash is not managed sufficiently (such as poor debtor management.) These could all result in situations where the business has insufficient cash to operate and where there is no opportunity for access to additional funds.
8. Poor location
Location, location, location retail and marketing gurus instruct, is the most critical element when considering the establishment or relocation for a business. In most cases I would wholeheartedly agree with the only exception where businesses are classified as destinations. When considering location in the context of small business failures the overwhelming issues are where locations are identified without thought to customers needs, visibility from high traffic areas or in relation to existing competitors. In many cases the reason for the choice of location is purely financially driven. Cheap rentals generally mean poor locations. Consider more expensive locations because they may be more suitable.
9. Key areas of the business not managed
I have seen time and time again where owners of businesses have no idea what inventory they have, how much is outstanding on their debtors book or have allowed debtors to exceed their credit terms without any action, where assets are being used incorrectly or not maintained adequately, or where spend on simple items such as staff teas and coffees is not being checked (I realise this could be seen as petty however you would be surprised sometimes to learn how much tea, coffee, milk and sugar staff are taking home.) It is important that business owners understand their business from the back door right through to the side walk. Do regular stock takes, make sure that you have the right controls in place to receive and store stock, make sure that you are on top of your debtors book and that shrinkage, wastage and business consumables are in line with your plan and budget. Something to know: 95% of all theft in a business is perpetrated by staff.
10. Over extendingOverextending comes in many forms such as hiring too many staff, or financing more assets than the business actually needs. Others are expanding your business footprint and operation into new locations or factories, and tying up valuable capital with more inventory that required. It is important that before you extend you play the what if game. Ask what if "x" happens or what if "y" happens. How will this impact the business? Make sure there is a plan and a budget when extending and that if things are not going according to plan, that you quickly adjust.
Everyone of these reasons for failure have tips and simple plans which could easily be implemented to resolve the weaknesses or eliminate them completely and ensure that the business is on the road to improved profitability. As a final note, if you happen to fail know that its not the end of the world and that you will learn more through the failure than any course could ever teach you. As the cowboys say "dust your self off and get back in the saddle."
Feedback is an important component of the learning process. As such I welcome your feedback, opinions and thoughts.
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