Monday, June 14, 2010

Some reasons why small businesses fail

Here are 14 top reasons, which might help you to determine why your business isn't growing and thriving. Some of them are related to learnable business skills; others relate to personal attitudes, habits, or self-sabotaging belief, which are not so easy to change, except through coaching or other self-development work.

  1. Mistaking a business for a hobby: Just because you love something doesn't mean you should convert it into a business. Too often businesses fail because the owner feels their passion is shared by others. Research your business idea and make sure it's viable.

  2. Poor planning: Yes, you must have a business plan. It can be a simple three-page plan or a huge 40-page plan. The point is that you've looked at all the aspects of your business and are prepared to handle problems when they arise. Your business plan helps you to focus on your goals and your vision, as well as setting out plans to accomplishing them. And don't get mellow – revisit and revise your business plan annually.

  3. Entrepreneurial excitement: Entrepreneurs often get excited about new ideas, but are unable to determine if they're "true opportunities" and/or put them into practice. Test every new idea against your business plan and mission statement before deciding whether to undertake it or not, and ask yourself, Do I have the time and skill to implement this?

  4. Putting all your eggs in one basket: Too often, small business owners will have just one product, one service or one big client. They cling tight to this one thing because it brings in good revenue. But what if the one thing disappears? Variety and diversification will cushion you against the ebb and flow of business tides.

  5. Poor record keeping and financial controls: Yes, you have to keep financial and business records, you have to review your revenue and expense report each month, and you have to file taxes and other business-related filings. If you don't know how to do these, or don't want to, get help from someone who does.

  6. Lack of experience in running a business or in the industry you're entering: There are so many hats you have to wear, from marketing and selling in order to run a business effectively. On top of that, you have to understand your industry, the skills required to offer your products and services, and the trends in the industry. If you don't know about these basic skills, educate yourself. Talk to others who are successfully running their own businesses, talk to industry leaders, get a book, find a website, get a coach, do your homework. And keep increasing your business and industry skills by attending classes or reading new books every year.

  7. Poor money management: You need to be able to live for one to two years without income when getting started; often businesses are very slow to get off the ground. Also, you have to create and use a realistic business budget, and not constantly drain the business income on personal spending.

  8. Wrong location: If your business runs out of commercial space, you need to make sure that you are convenient to your customers, and near to your suppliers and your employees.

  9. Competition: Customers will go where they can find the best products and services. It's important for you to know who your competition is, what they have to offer, and what makes your own products or services better.

  10. Procrastination and poor time management: Putting off tasks that you don't enjoy will sink your business faster than anything else. You can't afford to waste time on unimportant tasks while critical tasks pile up. All tasks need to be done; if you don't like to do them (or don't want to spend your time doing them), hire someone to do them for you. If your time management and prioritizing skills are rusty, hire a small business coach or take a class to help you.

  11. Ineffective marketing: Learn the basics of marketing and make sure that you track the success or failure of each marketing technique you use, then dump those that aren't working.

  12. Ineffective sales techniques: Once you have a potential client, you have to know how to lead them down the sales path. If you don't understand the basics of selling, get some education on it immediately. If a selling technique doesn't work, try another one.

  13. Poor customer service: Once you have a customer, you have to keep them. There are two key points here – make sure you pay attention to what the customer wants (and how these wants can change over time), and make sure you provide quick return of phone calls and emails, proper billing, win-win problem solving and an overall pleasant demeanor.

  14. Entrepreneurial burnout: owning your own business requires a huge investment of time, money, energy and emotion. It's easy to work long days and forget to take time off. But in the end, this only causes burnout where your motivation and creativity will suffer, and a pessimistic attitude prevails. You'll find yourself unable to balance your business and personal life, and both will suffer. Schedule self-care time into your work week and be religious about taking time off from your business

Small Business Failure Rate

William Dennis, senior research fellow for the National Federation of Independent Business' Education Foundation, analyzes a survey of 36,000 households each year for the Wells Fargo/NFIB Series on Business Starts and Stops. The latest one, available on the NFIB's Web site,, reported that 2.9 million businesses were launched in 1997, involving nearly 4 million people. Another 1 million people purchased 700,000 existing businesses that year.

The data showed that most new businesses are very small. More than two-thirds start in the owner's home, and only 21% initially employ someone besides the owner, says Dennis, who will release the 1998 report shortly. He doesn't track startups by industry category.

For business terminations, the Wells Fargo/NFIB study uses data of the U.S. Census Bureau, which only records closures of companies with employees. Those statistics show that about half of businesses that employ people are still operating five years after they open. "I feel good about the accuracy of the startup numbers," Dennis says, "but there are undoubtedly a lot of underreported stops."

The NFIB estimates that over the lifetime of a business, 39% are profitable, 30% break even, and 30% lose money, with 1% falling in the "unable to determine" category. Even when a business closes its doors, there can be many reasons for what's statistically a "failure," including a sale or merger, which may actually be a sign of robust financial health or good prospects. "When a business ends, it may be because the investors have lost their investments or because they have sold out profitably," Dennis notes.

The premise that there are many reasons -- not all of them bad -- for business closures, was behind a study by John Watson and Jim E. Everett published in the Journal of Small Business Management in October, 1996. The authors studied 5,196 startups in 51 managed shopping centers across Australia between 1961 and 1990 to try to determine true failure rates, because they felt that bankers and venture capitalists were basing negative views of small companies on dubious statistics.

Their data showed that annual failure rates were greater than 9% when failure was defined simply as "discontinuance of ownership." When failure was defined as bankruptcy, however, the number dropped to less than 1% annually. About 4% of the businesses that closed their doors each year "failed to make a go of it." And owners disposed of about 2% of businesses annually to prevent further loss. The authors concluded that cumulatively 64.2% of the businesses failed in a 10-year period -- if failure was measured as discontinuance of ownership -- but only 5.3% actually filed for bankruptcy during a decade.