Why Small Businesses Fail


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?

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Image credit: Geee Kay

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