Free Article – 10 Common Reasons Small Businesses Fail
Make sure you are avoiding these common traps
Key learning outcomes:
- Learn that most small businesses fail within five years.
- Adopt practices generally associated with big businesses to your advantage.
- Develop systems to maximise operational efficiency.
- Analyse your potential market and the financial statistics to ensure the survival of your business.
The actual numbers vary depending on the research that you read, but the shocking statistic is that a vast majority of small businesses will not survive beyond five years. In spite of this, every day hundreds and thousands of bright-eyed entrepreneurs open the doors of their new small business with loads of enthusiasm and hope. If this is you, one of the keys to ensuring you are not part of the vast majority is to understand the reasons why so many of these businesses fail. In this article we will take you through the common reasons why many small businesses close, to help bulletproof yourself against failure.
They fail to plan
This is one of the most common reasons businesses do not achieve to their potential. So many business owners have great ideas that never come to fruition simply because there was no plan of action in place. It is essential to do some major strategic business planning every three years. We provide you with an excellent step-by-step guide in this section of the website starting with our “Introduction to business planning” article. Once you have a detailed strategic plan in place you should then carry out a quarterly review to see how you are tracking. We recommend you then do a full review every 12 months to modify your goals and actions and to identify areas of focus for the next 12 months. A new strategic plan should be developed every three years to re-set the bigger direction and picture for the business.
They think like a small business
One of the things that tend to hold small businesses back is that they think too much like a small business. They think because they are small that they cannot use some of the advantages that big business use. For example, a big business may get volume discounts from a supplier. As a small business, a volume discount may not apply; however, there may be other options for reducing the cost of the goods coming into your business. The supplier may be open to offering reduced rates if you pay quickly, given big businesses are notorious for being slow payers. Or you may be able to arrange your delivery for a particular time of the month or year when their business is slow; for example, a big business may buy at the beginning of the month making your order more valuable in the middle or end of the month. One of the advantages a small business has over a big business is flexibility; you need to use this to your advantage.
They employ the wrong people
The problem with a small business is that often it grows at an inconsistent pace which makes it difficult to know when to put on additional staff and who is the right person. We see busy business owners rushing to employ someone on a part-time or ad-hoc basis in times of peak business, only to find that if they looked at the bigger picture a full-time employee would offer a better long-term solution. To ensure long-term success, it is essential to be clear about the type of person you need and what you need them to do before hiring them. Our article “Hiring new employees” will give you an outline of the areas you need to think about. Without doubt one of the most important things when hiring in small business is to look for people who buy into your vision rather than just someone who needs a job.
They fail to create systems
If you need to do something more than once, you should create a system for it. Time is often wasted in a small business because small tasks are done over and over again from scratch. We recommend you have systems and procedures in place for everything that happens more than once. For example, email enquiries may be answered one by one, although the content is pretty much the same. Creating an email template that simply needs to be personalised for each enquiry can save time and eliminate potential errors.
They make the business all about them
Too often a small business is all about the founder of the business. In order for the business to grow and prosper over the longer term, it needs to be able to operate effectively without that person working in the business. When a business revolves 100% around the owner of the business, the pressure can become too much for them. As the business grows and evolves, they find themselves working longer and longer hours and unable to take reasonable breaks throughout the year and properly recharge. Early in the business planning and modelling phase, you need to determine the long-term goals for the business. If you want the business to grow and expand, ensure early in the business life cycle that the business can function effectively without you.
They fail to seek expert help
Too often a small business can be caught in a classic catch-22 situation. If funds are limited, paying for expert help may seem out of reach; however, without the expert help, the business cannot thrive or develop as well as it could. No matter how clever we might think we are, none of us are experts at everything. It is important early in the life of your business to identify what you are good at and what skills you are lacking. If these missing skills are vital to the long-term success of the business, you should look at outsourcing as an investment rather than an expense. Remember, what might take you hours to do to an average standard may take an expert a fraction of the time, so your time would be better spent elsewhere. Do not be afraid to negotiate or look for ways to offer services in kind if you are in a poor cash flow situation. Business networking groups can be a great way to identify these types of opportunities.
They forget the basic numbers
For many small businesses the source of failure comes down to a lack of funds or financing. It is important from the early days of your business to watch the key financial indicators that will impact on the longevity of your business. For example, spending a lot of money on an expensive promotional campaign may seem enticing; however, unless the campaign can generate enough additional revenue to cover the expense, it is not going to be worthwhile. We always advise that you seek help from a professional in the finance or accounting industry to ensure your budgets and projections are viable and sustainable.
There was no market
Before launching a business you need to be certain that there will be demand for your product or service. Often a small business owner will start a business because they are good at something or have an idea they are passionate about. This enthusiasm and energy are key components for success; however, unless there are customers to buy the product or service, it will not be enough. Research the market before starting any business to ensure there is adequate demand.
They are too internally focused
This reason is not just confined to small business. Any business that is too internally focused will sooner or later experience a downturn in customer satisfaction and demand. At the end of the day it is all about the customer, because without them the business cannot survive. The more time you spend understanding your customers’ needs and wants, the more satisfied they will be.
They run out of steam
For many small businesses the source of failure is simply that the owners of the business run out of steam. Years of working in and feeling responsible for a business can leave them feeling tired, and they begin to lose the passion they had in the early days. When starting out, think about what the end game for you and your business might be. Think about a succession plan and an exit strategy. Is there someone in your business who might want to buy the business or take it over in the future? Are you building an asset that you may be able to sell at some stage? If you are losing your enthusiasm and energy, think about the options available to you, otherwise the end result may be less than ideal. Remember, any change in your attitude will quickly spread to your team and then flow through to your customers, and this will always have a negative impact on your business.
As a business owner a key component of managing your business is to manage risk. While thinking about what might go wrong may seem negative, it is worthwhile to put contingency plans in place. Use this article in conjunction with the others in our “Business strategy” section of the website to ensure your business has a sustainable future.Did you enjoy this complimentary article?
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