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Why Do Most Small Businesses Fail?

Guest post by: Adam Sonnhalter

Article Overview: Depending on what you've read or heard, the failure rate for small businesses in the first 5 years has been estimated to be anywhere from 40% to 90%. Whatever the actual figure, it's higher than it needs to be.

Why Do Most Small Businesses Fail?

Depending on what you've read or heard, the failure rate for small businesses in the first 5 years has been estimated to be anywhere from 40% to 90%. Whatever the actual figure, it's higher than it needs to be.

My partner Jack and I often find ourselves in a discussion about why small businesses fail and many people have asked us this question. Let me address this in two ways: i) the way small business owners see it, and ii) the way we see it.

First, let me define what I mean by "fail." Failure to us simply means the business is no longer operating. It doesn't matter whether it's out of business due to a lack of demand or if the owner just didn't want to commit the time any more. Failure simply means that the doors are now closed.

Let's start with the small business owners' reasons for why they fail (and why they are struggling):

1. Not Enough Money: this will usually sound like, "my business is undercapitalized," or "I don't have enough money to run my business," or "I don't have any cash in my bank account." This is one of those fallacies that is rarely challenged. If you have a successful business, it will either fund itself from excess cash flow or you can craft a strong enough story to attract outside financing (i.e. debt or equity). If neither is possible, chances are you should be looking for another business.
2. Not Enough Sales: owners will often say that "all I need is more sales and all the other problems will go away." This is true if a solid foundation exists in the business. Most small businesses we see would be out of business within a month if their current level of business doubled. They're just not equipped to handle the growth with either systems or people. Also, there is a key word missing from this phrase, PROFIT! More profitable sales will help quite a bit!
3. Not Enough Time: this means the owner(s) is typically working many more hours and probably making less money than when they were working for someone else. Thankfully we all have the same 24 hours in the day. The key is to organize that time to focus your activities and those of your employees around a profit plan for the business.
4. Not Enough Good People: either they can't find more people like the employees they have, or they can't find any good employees at all. Interesting that we have found good people all over the place. Chances are, you're just not attracting them to your business. A good starting point is to define what a good person looks like. What kind of personal characteristics, skills, drive, etc. makes a good employee for your business. Once you have clarity on this, you'll be amazed how many "good people" start to pop up.

So now that you have the top reasons for why business owners feel they fail and our thoughts on those reasons, here's our view for why companies fail:

1. Letting the People Get In The Way: there is one clarifying question that every business owner should ask himself when making a tough decision, "what's best for the organization?" This very simple question often gets confused by the "people" side of the business and worrying about what's best for Sally or Frank or whoever. At the end of the day, if the organization is doing well, all the individuals who are part of the organization will be doing well too.
2. Lack of Planning: one of the great things about most small business owners is that they're willing to just blow into things to make things happen vs. delaying. Action is a big factor in most of these owners' success. Usually early on in the business the owner will plan but as the company starts to grow, quite often the planning takes a back seat to the day-to-day grind. Our contention is that if you can't put it down on paper, the chances of it happening in real time are very slim.
3. Lack of Understanding of the Numbers: most small business owners we've met do not run their business by the numbers. What this means is that it becomes nearly impossible for the owner to know how the business is doing without being there all the time. We have a client who runs a business that is about 1,000 miles away and he's able to tell if someone is stealing from him just by seeing a change in the gross margin. Unfortunately, he's in the extreme minority.
4. Delaying Decisions: a phrase we're fond of telling business owners is that if you don't make a decision, somebody else from the outside will make that decision eventually. Let me quote Theodore Roosevelt on this topic, "In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing."
5. Unwillingness to Change: this is what we call the "old man" syndrome where owners will say things like "we've been doing it this way for years and it's always worked for us."
6. Losing Sight of the Bigger Picture: this problem is two-fold: i) owners will often lose sight of the fact that they're in business to make a profit, and ii) owners often get so caught up in their own little world that they don't look around at what's happening either in their bigger market or in the world at large. Owners tend to get very emotionally involved in their business (it's their baby) and they focus on the business to the exclusion of everything else going on around them. If the business isn't making money, your job as the owner is to find a way for it to make money or GET OUT OF THE BUSINESS. There are lots of other ways to make money!

One of the dirty little secrets about running a small business is that to run it well can be really pretty BORING. Just doing a lot of the basic blocking and tackling is what makes a business succeed and continue to be profitable.

The mission of our business coaching at MVP is to help reduce the number of small business failures. In a perfect world we wouldn't see any small businesses failing, they'd just shift their focus to a more profitable venture.

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Article Tags: failure rate, small businesses



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