6 Key reasons a small business fails and how to prevent it happening

Having started a successful small business from scratch, I understand the challenges small business owners face. You wear many hats; manager, consultant, accountant, bookkeeper, marketer, receptionist, salesperson, customer service rep and even the janitor. Ring a bell?

As a result, many small businesses end up in chaos and many more end up failing. According to the US Small Business Association about two-thirds of businesses survive 2 years, half of all businesses will survive 5 years, and one-third will survive 10 years.

The longer a company has been in business, the more likely it is to stay in business – it’s those first few years that are the hardest.

Let’s examine why many small businesses fail and what to do about it.

1. The wrong motivation

Often due to unfortunate circumstances such as being laid off, people either start a business or buy a business to buy themselves a job. Example; construction worker to fast food operator, corporate executive to accommodation provider or schoolteacher to retailer. The problem is, when you buy yourself a job you don’t necessarily have a passion for the business. Without passion, showing up every day will be a grind.

For others, they start a business believing it’s their road to financial freedom. Yay, I don’t have a boss anymore. I can take time off when I want to, spend more time with the family and best of all, I don’t have to answer to anyone.

For others, they might feel they do all the work and the boss gets all the profit. I’ll go into business for myself.

Sound familiar?

The reality is, many small business owners never worked so hard in all their life and as for the financial freedom and more time with the family, this is often a myth.

What you need is the right motivation.

You must have a passion and love the business you are going into. You must also strongly believe in yourself and in the products and services you provide. If you don’t believe in your products or services you will never succeed.

Being an entrepreneur is hard work and can be fraught with many pitfalls therefore you must be resilient and motivated to succeed. You will face any challenges thrown at you therefore you must attack these challenges with drive and determination and not let defeat overcome you.

Most of all, you need the right attitude – a positive one and be prepared to learn. Successful entrepreneurs are life long learners.

2. Poor management

Depending on the research, poor management is often cited as the number one reason small businesses fail.If you’ve never run a business before or never been in a leadership position, you might lack the skill sets to lead others, manage finances or grow sales. Worse still, if the business you are in is not your expertise or an industry you know, you might flounder.  

New business owners usually come into business with one area of expertise – what they were trained and qualified to do. For example, an engineer, a baker, a teacher, a bookkeeper, a chef, a lawyer, a marketer or banker and so on. That’s fantastic to bring all that expertise into a new business, but what got you there won’t get you here.

Your expertise might get you started, but what’s often lacking is the expertise in other areas such as finance, purchasing, selling, personnel management and leading others. Unless business owners recognize their strengths and weaknesses, new business owners may face disaster.

New business owners, particularly if they feel insecure as the designated leader, often seek absolute compliance from their people to assert their position. They adopt the attitude of, “I am the boss, you will do as I say!” Poor leaders try to influence their people by being abrasive or aggressive. They feel, because they own the business gives them the right to bully and disrespect others.

Very soon they learn that compliance is not the same as commitment and they are likely to face frustration and failure. Without commitment, people will not be innovative, take the initiative or go that extra mile.

People make or break a business. People don’t like being told what to do, they look for leadership. A lack of people management skills will lead to employee attrition. Of those who stay, do so reluctantly and directly or indirectly sabotage the business leading to poor sales and poor customer retention.

Invest in yourself and your people

No business owner has all the requisite skills to keep a business afloat. They must recognize what they are good at and what they are not. Whatever they are not good at, they need to employ outside contractors who are specialists in their field or employ others to compensate for this weakness. This is all very well in sales, operations and finances, but what about leading others. This is not something that is easily delegated therefore it’s essential to invest in your leadership, management and delegation skills.

A critical skill for business owners to have is the ability to recruit good people. Money alone doesn’t always motivate people into taking on a role. You can always offer other benefits such as flexi-time, employee development or other compensation packages that appeals to whatever motivates them.

People leave managers, not organizations. Leading others requires a completely different set of skills to being a technician or operator. It means:

• Setting the future direction of the business by creating and communicating a powerful vision of the future.
• Commit to leading people to achieve goals and objectives
• Developing a culture of empowerment and excellence
• Motivating and inspiring others
• Recruiting and retaining talent
• Keeping people accountable and managing performance

Developing your leadership skills is an absolute must if you want to stay in business.

3. Not knowing how to grow your customer base

Regardless of their role as a small business owner, they must understand the sales process even if they don’t directly sell themselves. Sales are the lifeblood of any business. Without sales – you have no business.

More than just sales, sales need to be profitable and clients need to be good clients. Without having some understanding of the sales process, how can business owners make informed decisions that affect their team and their customers. If sales and marketing aren’t properly understood, when times are tough the first thing that usually gets cut is the sales and marketing budget. This can be a big mistake.

No customers – no business.

This is because many business owners have no understanding of sales and marketing.

Train all your people in sales

Yes, you read that right, train all your people in sales even if they are not the dedicated sales people.

Why? Every person in working in a small business comes face to face with a potential customer at some point. How they treat a potential customer is dependent as to whether the prospect will do business with them.

For example, if a receptionist is rude on the phone, or a delivery driver dumps goods at a doorstep with no care, or the bookkeeper or accountant is abrasive when asking a customer to pay, this will turn customers away. Alternatively, if they are trained in sales, they know how important it is to build trust and rapport with potential customers and can successfully lead them into the buying process. They will also know how important it is to retain them as a customer for its 6 times more expensive to attract a new customer than retain an old one.

Every employee or business owner will get asked at some point, “What do you do? or Where do you work?” Handling this question with a powerful and compelling Elevator Pitch will leave prospects wanting to know more.

4. Expanding too quickly

Over expansion often happens when business owners confuse success with how fast they can expand their business.

When a business expands too quickly, proper planning is often missing. The same principles of cash flow, working capital and good management apply. Just because a business is successful in one area, it doesn’t mean the same will be true moving into other locations or products and services.

Expanding too quickly is fraught with risk if business owners don’t have good systems and processes in place. They can’t be in two places at once so will need to rely on others to work for them. This means letting go of the reigns and learning to delegate.

Plan before you expand

Paramount to expansion is to ensure the planning process is robust. Conduct your market research ahead of time. Find out if there is a market for you. You do not want to enter a declining market.

Ensure you have robust systems and processes in place for it’s likely you will be overseeing the business remotely. By remotely, it means you will most likely have to put a manager in place and they need a successful platform from which to springboard off. This means you must delegate and take your leadership and management skills to another level.

5. Lack of working capital

A fatal mistake that new business owners make is failing to allow for the peaks and troughs in sales. They underestimate how money is required for the start-up phase until they are cash flowing positively.

There are several phases to financing a business. The start-up phase where capital is spent on plant and equipment, vehicles, inventory, premises, signage, websites etc. just to open the doors. The next phase is allowing enough capital for ongoing overheads such as rent, power, phone, wages (including their own), accounting fees, taxes, marketing materials etc. – these are the ongoing costs of staying in business. The third phase of working capital is expanding the business.

During the first and second phase, a business needs ongoing capital until such time there are enough profitable sales to pay these ongoing expenses. Many new to business fail to realize, that a positive cash flow doesn’t happen overnight. Without sufficient working capital, a business is severely at risk of going out of business very quickly.

If a business offers 7 day or 30-day payment terms, new business owners fail to realize that they can sometimes wait up to 3-4 months to get paid. It’s vital to protect your investment with enough reserves to get you through this important start-up phase.

According to Hiscox’s 2015 DNA of an Entrepreneur Report, 21 percent of US entrepreneurs have resorted to using their credit cards to fund their businesses.

Employ financial expertise

Unless you are a qualified accountant, have a background in start-up funding or have a knack for creating budgets, forecasting and managing those budgets, employ an expert to help create your financial plans. A financial plan should make up one section in your overall business plan. Your financial plan needs to include realistic projections of set up cost, sales, expenses, overheads and working capital requirements and ongoing cash flow. If this is not your expertise, don’t leave it to chance, consult an expert. This is not an area to scrimp on consulting fees.

6. Lack of planning

Many small business owners don’t have a business plan. It doesn’t need to be a sophisticated 100-page document with fancy graphs and projections, it needs to be realistic and based on accurate assumptions based on market research.

Market research is an important component of business planning. By failing to plan, a business plans to fail. They won’t know if their products or services are right for the market, they won’t know if their pricing strategy is right and they also won’t know how to get their products or services to market.

Without adequate planning, a business ends up on a merry go round with no goals and objectives in sight. Experimenting on the go can chew up capital very quickly. If you don’t have a destination, how do you know when you arrive.

Create robust plans

What I mean by robust plans, it’s not the length of your business plan, it’s the quality. Business plans are meant to be used as a guide to achieving business objectives. For many if they do have a plan, they are a fancy document that sits on the shelf and is never looked at again or if looked at, never updated.

Included in your business plan would be a tactical plan of who does what and when. The tactical plan also includes milestones in terms of goals and KPIs (Key Performance Indicators.) Milestones should be SMART (Specific, Measurable, Attainable, Relevant and Time Phased). For example, you might have a goal to grow your sales by 10% within a three-month time frame. At the three-month point, you would measure how much your sales have grown since setting the goal. The results will show you if you are on track or you need to adjust your sales strategy. 

By avoiding these 6 pitfalls you are less likely to become a statistic.