Why Small Businesses Fail

shipwreck

I digested and condensed all the top reasons why small businesses fail from the top sources (NY Times, Forbes, Inc, Guardian). Scan this list of pitfalls to make sure you’re not going to be blindsided.

  1. Demand Shortage. Maybe you jumped onto the trend at the peak (2008 real estate anyone?) or you didn’t see the disrupter coming (sorry RIM) but the crowd just doesn’t want what you’re selling. Make sure that you have a profitable business model and a healthy target market.
  2. Incompetence. If you are arrogant or a perfectionist [stares at his shoes] or paranoid, you’re getting in your own way. A business round table group like Vistage can help you get out of your head and form a sound opinion about your own skills and growth needs.
  3. Excessive Growth. You take on too much and become the victim of your own success. I grew one of my businesses too slowly and created a headache for myself. Some do the opposite and get overextended like an army cut off from its supply lines.
  4. Poor Information. You don’t watch the numbers or watch the wrong ones. My CPA gave me three numbers to track for my consulting business. Understand the financial drivers in your industry.
  5. No Cushion. Bad things happen. The timing doesn’t always work. Obey the number one rule of business: Don’t run out of cash!  Borrowing is evil unless you have the cash to pay it back. If only I had a dollar now for every dollar I didn’t have then! Price intelligently, know your profit margin, and protect your cash flow.
  6. Bored Customers. Unless you live in Lake Wobegon, not all companies can be above average. Some of them are below the bar and your customers know it. Giving up on great service will take you out of the game. There’s always a new, fresh face coming along and they sell basically the same thing you do (according to your customers). You don’t have a relationship with a market. You have a relationship with people — customers. Are you connected in ways that are meaningful to them?
  7. Operational friction. Your overhead is too high or your process sucks. Get lean or get clobbered. The market is no place for the fat or lazy.
  8. Burnout. Many businesses thrive on the owner’s energy. A downturn follows an owner who is fried, or getting old, or has a family event that takes them out of play. I once got a gig after the previous consultant, who was going through a divorce, stood up one day and said, “I can’t do this any more,” and walked out.
  9. Management malfunction. Even small companies need vision and planning. Set standards. Measure things. Require character. Even one toxic relationship can put your dream in the ditch. Heaven help you if it’s your partner. Mind your core values and protect your culture.
  10. Inattention. Are you trying to do business in the 21st century with methods from the 80’s? The marketing world has changed and that change continues to accelerate. Where are your customers putting their attention? Have you asked? Is your message clear on that medium? What are your competitors doing? Can you afford not to know?
  11. Over-concentration. It’s tempting to give all your attention to that demanding (and hopefully profitable) customer, but failure to diversify can kill your business. One of my favorite people in the distribution business lost his main account and the firm he had taken over from his father went into a death-spiral. More than money was lost.
  12. No Backup. Every business has risks. Do you know yours and have a plan to address them? If you lose a key asset, can you replace them with someone qualified? Is your data backed up? Do you have redundant distribution channels? Did you know that cyber theft shuts down 60% of its small business victims?

Want More?

Try this in-depth look at 200 start-up postmortems.

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Image credit: Geee Kay

Is This for You?

Is starting a small business for you?

This is the red pill post. If you’ve already made up your mind to start your own business, you can skip this page. But if you’re still on the fence or just want a reminder of what you’re up against…

Many Businesses Fail

“According to the U.S. Bureau of Labor Statistics, about 50% of all new businesses survive 5 years or more, and about one-third survive 10-years or more.” ~ SuccessHarbor

So the first five years is a coin toss. Look at the person next to you. One of you won’t make it. At the ten year mark, one of your Three Amigos business buddies will be still standing. You can improve your odds, of course, by learning why small businesses fail.

You Have a Choice

two-doors

Zappos offers new-hires $2000 to walk away and not take the job they have just interviewed for. They know that not everyone is going to like the company and fit into their customer-service zealot culture. They are doing both Zappos and the would-be employee a huge service by letting them walk away early instead of making both sides suffer through a bad fit.

I’m offering you a similar but much bigger deal. Behind door number one is a steady paycheck, promotions, paid vacation, health benefits and the opportunity to dodge the scar tissue and angina that goes with running your own business. Behind door number two? It’s all you, baby.

Should you make the leap or keep the paycheck? It’s not an easy question, but I’ll give you my 57 cents on the subject ($0.02 adjusted for inflation). All those magazine covers touting the brave new world of being self-employed? There’s a good chance they’re not talking about you or me. The press loves to glorify the outliers — the few who make it big. Take a thorough inventory of who you are and what you are up against before making the leap.
Take inventory of who you are and what you are up against before making the leap. Click To Tweet

Decision Factors

Look over the following lists and see how many of the items you can relate to…

Keep the Paycheck if you:
  • Fit in with your team
  • Like predictability
  • Enjoy the group
  • Whine about bureaucracy
  • Need to make money
  • Admire your peers
  • Dream about your own business
  • Enjoy free pizza Fridays
  • Caught the game this weekend
  • Talk security with your spouse
Start a Small Business if you:
  • Feel like you don’t belong
  • Get bored easily
  • Like being alone
  • Make bureaucrats angry
  • Need to create things
  • Know you can do better
  • Write business ideas weekly
  • Forget to eat while blogging
  • Don’t know who was playing
  • Talk adventure with your spouse

Reality Check

Can a list of bullets really predict your future success as a small business owner? Of course not. Every person who starts a business is a different and some ideas are riskier than others.

When I started my software business in 1997, I did so with the understanding that my friend had “a few months” of contracting work that he thought I could help with. I was sick of working for someone else and knew I could do it better myself. I was the classic E-Myth case study, having an entrepreneurial fit. I told my wife that I was going to quit my steady job working for a local consulting company and she said, “That’s nice, dear. By the way, I’m pregnant with our third child.” I asked her to wait a couple of weeks and see. Maybe she she was wrong. Good timing on my part, right?

That first contract lasted 18 months and the business ran for 15 years. According to the stats, I beat the odds. But… it was possibly the worst financial decision I ever made. Those fifteen years were filled with all kinds of ups and downs:

  • The joy of landing a new client
  • The depression of losing a client when the NPO changed directors
  • The client who stiffed me for $56K
  • The heartache of my first (and hopefully last) lawsuit
  • Very Lean years and almost lush years

Notice I didn’t say it was the worst decision. Just the worst financial decision. I could have made (and saved) more money by staying employed as a software pro, provided that I didn’t go insane. There are other reasons than money to make the leap, as hinted at by the bullets above. It could be that you’re not good employee material. Perhaps you value your independence above all else. Maybe it’s an undeniable sense of mission. Just don’t ignore the very real risks.

Before you leap into the void, do some reading on Starting a Business to gain confidence that you’re leaping for the right reasons.  And good luck!

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Pros & Cons of Starting a Small Business

pros-and-cons

Ignorance may be bliss some days, but not when starting a small business. It’s better to go with the adage, “Forewarned is forearmed.” Knowing both the positive and negative aspects of becoming a business owner will help you make the right decision for you and your family.

The list below is a categorized compilation (that’s fun to say) of a dozen articles on the advantages and disadvantages of starting your own small business.

CATEGORY PROS CONS
Money You can make more than an employer will pay you You will risk your own funds with no guarantee of a paycheck
Control You are your own boss You must keep your promises to customers, employees, partners, and vendors
Direction You get to pick your mission and the type of customers you want You are responsible for all the tough choices about the product or service, the right market, the right strategy and tactics for making your business model work
Risk You get to roll the dice yourself You have to deal with snake eyes
Location You decide where and when to work You bear the burden of whatever overhead you choose (office, equipment, etc.)
Success Limited only by our own talent and effort There are no guarantees; Resilience is a commonly touted requirement for founders
Values You set the initial values for your company Hiring people just like you will create a stunted, one-dimensional team
Responsibility You will have autonomy to make every decision You are responsible for all the tough calls
Initiative You get to test your own ideas You own each failure
Stability No one can fire you; You directly influence your own prosperity Your income may go up and down
Staff You control who works for you and how much you grow You have to hire enough people to prevent burning people out, manage them well, deal with performance issues
Health Flexibility to schedule exercise and pick restaurants Pressure to work too long and not take care of yourself
Stress No one is telling you what to do There is always more work to do; You can feel overwhelmed
Interests You can work on what excites you The boring details of legal and accounting have to get done
Family, Friends, Hobbies, Vacation Freedom to set your own hours Pressure to get critical things done and maintain cash flow; Family and friendships can suffer
Learning Develop broad knowledge of business; Try new things You have to do things you don’t like until you can afford help
Influence You have direct contact with customers and partners You must be able to sell your product or service
Confidence Running a business can bolster your self-belief Working alone on tough decisions is difficult; You must be able to handle failure

Now that you know, how do you make the decision to start your own small business or not? What is about you that will weight the scales in your favor to succeed? Check out this list of decision factors.

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