Why Small Businesses Fail
by Fern Reiss, CEO, PublishingGame.com/Expertizing.com
Over half of small businesses fail within three years of starting.
Those are depressing odds for anyone considering starting—or having already started—a small business.
Why are there so many failures? And how can you prevent your business from joining the list?
If you can prevent your business from the following pitfalls, you’ll have a good chance of succeeding into maturity. Here, then, are the nine most likely problems to kill your small business—and what you can do about them.
Poor planning. The biggest problem, and the largest contributor to small business failure, is lack of proper planning. You need to plan all aspects of your business—from how much money you’ll need, to what equipment you should purchase, to which location is optimal, to how you’re going to handle staffing. Many entrepreneurs have a great idea for a new business and start it without spending the crucial time to sit down and plan for its success. Some are intrigued by the lure of owning their own business, but there are pitfalls to owning your own business, too—particularly if you haven’t given much thought to how hard you’ll have to work, how much money you’ll need to invest, and how much of the ‘scut’ work you’ll need to do, at least initially. Creating a business plan is boring and time-consuming, but if you don’t have a plan for success, you won’t succeed. Spend the time necessary to craft a sound business plan—and then be sure you review it periodically, to make sure it’s continuing to chart your course.
Inadequate or incorrect staffing. Entrepreneurs are good at starting businesses—but they are not always the best at running a business once it’s started, and a primary pitfall is staffing. Just because you have correctly identified a business niche doesn’t mean that you’re necessarily well positioned to run it yourself or that you understand each of the job responsibilities enough to staff it properly. You need to think specifically about each of the tasks necessary to run your business, and who is best suited to perform these tasks. The trick here is to early on in the game identify what staffing is optimal, and then work on filling those positions with the correct person. The more completely you’ve zeroed in on what type of employees you need, and what precisely they will do, the more successful your business will be. Consider the roles and responsibilities from both the supply side (What types of products or services do you need to produce?) and the customer side (What sorts of employees need to be delivering the services, staffing the telephones, answering the door, etc?)
Poor time organization. Most small businesses are deluged by paperwork (the same way most individuals feel overwhelmed with paperwork.) Staying on top of daily emails that need replies, telephone calls that need to be returned, invoices that need to be paid, supplies that need to be ordered, employee paperwork that needs to be managed, leases and telephone bills that need to be handled, supplies that need to be inventoried, and the myriad of other forms and papers that make up any small business, and you may find yourself completely overwhelmed. You need to find a time management system that works for you, and stay on top of the paper shuffling—or you’ll be buried by it. Take a good time management class before you start your business, and pick and stick to a system that works for you. Otherwise, you’re going to find your business suffers, and may even sputter to a complete stop, because of untended paperwork.
Inadequate capital. Small businesses that are insufficiently capitalized (i.e., don’t have enough money) can’t be successful. You need to make sure that you’re going to have enough ready cash every month to pay suppliers and employees, to purchase inventory and equipment, and to handle the ‘expected’ unexpected expenses. A good business plan should reveal how much capital you need to start your business. Also, beware the related problem of businesses that have too much capital tied up in inventory and equipment. Consider leasing equipment instead, and manufacture only as much inventory as you’re going to need in a certain timeframe. You don’t want to end up in a situation where your income is streaming in too slowly to meet your expenses: Even a successful business has to start with adequate capitalization and carefully handle its cash flow, or you could find yourself profitable but still out of business.
Poor financial records. You can’t run a successful business if you’re shoddy about keeping track of your income and expenses. (This is true for the entire life of the business, but it’s especially true when you’re getting started.) You need to keep track of every expenditure meticulously, so that you know where your income is going and you can manage the business appropriately. If inventory is costing more than you’d expected, or employee overtime is taking a cut out of your bottom line, you’ll need to know that quickly so that you can respond quickly. Similarly, you’ll want to know precisely where your income is coming from, and to what you can attribute it; if most of your sales last month were a result of the advertising you did in the local newspaper, you need to know that, so you can replicate it. Be sure you’ve hired a good financial person/accountant with a strong small business background, and that they’re generating regular reports for you so that you’re making correct business decisions.
Inadequate location. Businesses need to pay attention to whether their physical location is appropriate for their customer base. If you’re not convenient to your target market, then you’re going to find it difficult to attract and keep customers. Keep in mind items like parking (do you have enough of it nearby so people won’t feel frustrated when trying to do business with you), traffic (if you’re in a great location but nobody can ever get to you without spending a day on the highway stuck in bumper-to-bumper traffic, that’s not a good location), and convenience (most businesses do best near where their clientele or customer base lives or works) when planning your locale. Don’t overlook items such as safety; if you’re in an area where people are hesitant to leave their vehicles or are afraid of being mugged, your business probably won’t be successful. These days, many businesses also need to consider their web location, because so many people are using the internet to do their business. So be sure that you have a website, and that people can search for you online and find you easily. (This is something you can hire a professional to do for you if you don’t know how to do it on your own—it’s called search engine optimization.)
Inattention to the marketplace. To be successful, you need to stay on top of what your customers want—and who else is giving it to them. Keep track of what your competitors are offering; if they’ve got a new service or product, see if you can replicate it or offer your customers something similar. Or be creative, and offer your customers something better: There’s one car mechanic in my town that does better than all the other car mechanics in the area—because he’s the only one who offers complimentary cars for use the day yours is in the shop, and complimentary pizza when you’re sitting around waiting for your car to be finished. Offer something new, innovative, that your customers will appreciate. Be sure that you’re speaking to your customers often enough to know what they’re looking for—and then figure out a way to give it to them.
Insufficient advice. Rather than risking failure because you haven’t gotten advice from the right people, consider putting together an official or unofficial advisory board of experts who can assist you on a regular basis in keeping your business on track. These might include someone versed in finances, someone else with legal expertise, and others with experience in your industry. The benefits of a regular (monthly is probably best) meeting with experts who can advise you can’t be underestimated. And don’t neglect the education you can get from tradeshows in your industry, and other educational venues: The cost of attending such educational events is far outweighed by the business benefits if you get even one stellar idea each time you attend.
Bad customer service. It’s much easier to sell something again to an existing customer than it is to attract a new customer. And people love to tell their friends about good service they’ve experienced—as well as bad: A disenfranchised customer is something you should avoid at all costs. And if there’s a way to go out of your way to make a customer happy, do it. Be sure you’re offering the ultimate in customer service, and that you’re promptly and properly rectifying problems. Word of mouth works both ways in business.
Poor marketing. Perhaps the biggest problem small businesses face is insufficient or poor marketing. You can build the best mousetrap in the world—but if no one knows about it, your business won’t be successful. You need to figure out a way to get the word out about your business, and keep milking the press for coverage so that people remember you. There are tons of things you can do to generate publicity: Organize a contest. Celebrate a made-up holiday. Hold unusual sales (like 20% off everything that starts with the letter “W”). Good marketing and publicity needn’t take large sums of money, but they do take time, creativity, and knowledge, so be sure you’ve factored that into your budget and schedule so that you don’t neglect it.
If you keep these tips in mind, your small business will be ahead of the game—and headed for success!
Fern Reiss of PublishingGame.com/Expertizing.com, consults with small and large businesses on how to successfully grow, often via increased media attention. Sign up at http://www.Expertizing.com to get her complimentary monthly tips on getting more media attention for your business.