Though many studies have been conducted and articles written attempting to pinpoint why half of new small businesses don’t make it past five years, in reality small businesses often fail as a result of several simultaneous factors. The following are ten root causes of small business failure.
Many “Top Business Mistakes” Articles Only Address the Symptoms, Not the Real Problems…
A simple online search for such articles will generally lead to a rundown of the usual suspects: lack of capital, ineffective marketing strategies, not keeping good records, not taking advantage of available technologies, etc… While it’s certainly true that these factors that can precipitate small business failure, what the average reader may fail to realize is that often they are the result of bigger, more fundamental problems. When the fundamentals are out of whack, then it can easily throw the whole company off.
Ten Fundamental Reasons Why Small Businesses Fail
Below are ten areas where misdirection and lack of appropriate input can set in motion a self-destructive chain of events, eventually resulting in a small business failure:
1. Making blind decisions. As a small business owner, you are faced with business decisions every day some of them will be bigger (such as what to charge for a particular product or service or how to advertise the business), while others are smaller (how should this transaction be recorded; should this receipt be kept?).
Many small businesses fail because their owners entered markets, chose locations, or initiated seemingly innocuous policies, strategies, or habits that were inappropriate for their particular business, and many of these same decisions could have easily been avoided had these owners done some research or exercised a little due diligence along the way.
2. Unrealistic expectations. With so much attention being lavished on the young-and-suddenly-rich set of tech entrepreneurs and with the Internet still being hailed (falsely) as a place to “get rich quick” or make “easy money,” many would-be entrepreneurs continue to flock to the online world with gold nuggets in their eyes. It usually doesn’t take too long before they come to the unavoidable realization that success in business typically takes work, know-how, and… time.
This can be avoided by asking questions. You should consider asking experienced mentors, counselors, consultants, or those who successfully operate businesses within the same industry what it took to get to where they are.
3. Not appropriately handling setbacks. The unavoidable reality in business and in life is that setbacks can and will happen along the way. More often then not, how the business owner and his or her management team respond to these hurdles will shape the future success or failure of the company.
Even where something was a colossal failure (such as an ineffective marketing strategy, or an unpopular change to a product or service) there is often much that can be learned, altered, and applied in the future.
4. No back up systems in place. One of the most influential factors when dealing with a setback is the presence of adequate backup systems and procedures. A well-prepared business disaster plan is a must. But beyond that, there needs to be an overall strategy to hedge against costly setbacks and possible failure.
Here are a couple of examples to illustrate what I mean:
- A sole proprietor or self-employed professional should ensure that at any given moment he or she is generating multiple streams of income. That way, if one area of the business is put on hold, there are other areas of income to fall back on. It will help to take some of the pressure off and allow the business owner to then react to the setback more calmly.
- Those operating a seasonal business should seek out ways to maximize (ex: use the time to evaluate operations and plan for the future) and even profit from (ex: rent out unused space or equipment) the off season.
5. Not monitoring operations. Having tools, metrics, and procedures in place to monitor the key areas of your business is like going to the doctor for a checkup. They allow you to spot potential shortfalls before they blow out of control and recognize the problem areas so that corrective action can be taken.
Many small businesses fail simply because their owners were out of touch with what was happening within their own business, and by the time they did realize, it was too late.
6. Not delegating tasks. The ownership of a small business typically comes with a slew of other titles: manager, marketer, secretary, bookkeeper, salesman, etc. While it may be part and parcel of running a small company (especially if the business is new and/or you are working on your own or are employing only a few people) there are a few unavoidable facts of nature to consider:
- Most people excel in some areas, while they struggle or get by in others.
- A individual’s time, energy, and resources are limited.
- It’s impossible for one person to know it all.
- When other people are involved, it brings in different perspectives, ideas, and areas of expertise.
Knowing how to properly delegate or outsource work and knowing when to seek out professional advice can be a big factor in whether a business is successful or not.
7. Not knowing how to set boundaries. I’ve mentioned in several of my previous posts, that to be successful in business you need to learn the fine art of saying “no.” Sometimes, no means walking away from ineffective business tools and techniques, sometimes it may mean turning away a potential client, and sometimes it means stopping some other kind of behavior or business habit that is negatively impacting the business you’ve gone to great lengths to build up.
8. Ineffective resource management. Without access to the necessary resources (i.e. money, skilled or experienced employees, equipment, and supplies) your business won’t go very far. But in order to manage your resources effectively, it’s not just about having systems in place to track how your resources are being used, you also have to be keenly aware of the true value of your assets (especially your employees) and how their presence or absence ultimately affects your bottom line.
And don’t forget…Your customers are resources also!
9. Ineffective communication skills. If you are challenged when it comes to expressing yourself and your ideas in certain situations or mediums, then either hire someone to help you communicate better and/or give the job to someone else. These days, effective communication in business is vital and it spans the less traditional methods of communication as well, such as your website, blog, and social networking circles.
10. Bad timing. Even if you’ve got the best business idea and have the know-how to turn it into a profitable endeavor, your business can fail simply because the timing was off. Taking the plunge into entrepreneurship should come with some measure of forethought. The issue of timing is especially important for students, home-business owners, and older, first-time entrepreneurs. You don’t want to turn your life upside down only to find out that you currently either do not have the time, patience, or the available resources to build and run a new business.
Bottom line: when it comes to why a promising small business would fail, as much as we would like to point a finger on insufficient capital, poor marketing, or the avoidance of social networking, it is usually not so simple as that. With a little prodding, we’d typically see that there is a whole story behind it.