Do You Know the Top 5 Reasons Small Businesses Fail?

 

According to the US Census Bureau in 2013 there were 400,000 new businesses created and 470,000 existing businesses were closed. That’s approximately 117% termination rate! In today’s connected and technologically advanced world, where the tools are so readily available to start, run, and be successful at business, I’m astounded to hear those facts. I bet you are too.

Of course you and I as business owners are thinking “well that’s not me, those businesses must have made huge mistakes”. Right? But when you look into the research, here are some common causes. See if you can relate to any of these.

  1. Lack of funds

There are numerous reasons your business could fall short on funds. The annual report by the Corporation for Enterprise Development indicates that 37% of experienced business owners fall short of the cash they need to cover their expenses. That could be you if you don’t see the warning signs.

Consider these potential warning signs for your business:

  • Over-extending or growing too fast.
  • Not starting with a minimally viable product or service (MVP or MVS).
  • Expenses becoming too costly such as labor, marketing, supplies, office space, and equipment.
  • Unprofitable business model and revenue streams.
  • Inability to attain additional funding from outside sources (such as loans, venture capitalists, angel investors, or personal funding).
  1. Competition and customers

Both underestimating the competition and not understanding your customers can be a large factors in the ultimate demise of your business. A 2014 study by Accenture revealed that 66% of consumers in 1 out of 10 industries changed to a different company due to customer service issues. And 82% of consumers felt that the company they left could have done more to prevent them from switching companies.

This could be you, especially if you don’t ask yourself the following questions.

  • Do you know who your competition is and what differentiates your products and services from theirs?
  • Do you know how your customers feel about your products and services?
  • Do you have your feelers out for new technologies or advancements in your industry that are attracting consumers?
  • Are your competitors implementing changes or technologies that you have overlooked?

Another aspect is the overreliance on too few customers. Some small businesses are completely reliant on one or two large customers. If you have all your eggs in one basket and the basket decides to get up and go somewhere else that could be the end of your business. Yikes!

It’s critical in today’s hyper-fast-paced business world to not only research and understand your competition, customers, and your market, but to quickly react to changes that move your business to the front lines. Even if you think you’re in a very steady and reliable market with plenty of customers and very little competition, it only takes one competitor with one great product or service that resonates with your customers to rock your boat.

  1. Operational inefficiencies

Now is the time to flush out operational inefficiencies and focus on a lean, mean business machine. But what exactly are operational efficiencies? Operational inefficiencies can be broken down into a number of more specific areas such as:

  • Wasting money, time, supplies, inventory, and products.
  • Repetition and/or replication of tasks, duties, services, and paperwork (duplication of effort).
  • Paper vs online everything.
  • Inefficient or ineffective communications…this is a huge waste of time and money!
  • Imbalanced workload. Too many employees doing too little, or some employees doing too much and others not enough.
  • Owner and/or managers having to redo the work of employees not performing properly.
  • Inadequate or unorganized inventory management system.
  • Inadequate or unorganized bookkeeping system (tracking expenses, receipts, usage, inventory, etc.).
  • Owners and/or managers doing the majority of the work, and not training and delegating to their employees.
  • Paying for marketing that is not generating a sufficient return on investment (ROI).
  • Inability to negotiate terms for rent, labor, and materials leaving with higher costs.

These are just a few areas to address, but major players in becoming an efficient, lean business and increasing your bottom-line.

  1. Dysfunctional management/leadership

While leadership and management are not technically the same, both play a huge role in a company’s performance and ability to succeed. Especially in today’s economy and employee landscape, it’s essential for management and company leadership to not only present a united front, but provide a model for the company culture, focus, and vision. The following list represents some areas where management and leadership need to concentrate to provide a solid foundation for company success.

  • Owners and/or managers with lack of focus, vision, planning, communication skills, and motivational techniques (all stick, no carrot).
  • Owners and/or managers lacking standards and values, consistency, non-partiality, inter-personal skills, foresight, and conflict resolution skills.
  • Lack of succession plan: nepotism, power struggles, poorly qualified replacements.
  • Owners and/or managers using conflicting messages and communications (for example: lecturing employees about cutting costs, then bragging about their new expensive vacation or house).
  • Owners and/or managers without management skills or training. This is true for many entrepreneurs. Entrepreneurs aren’t always great managers of people, they can be, but not always. They are often better leaders than managers.
  • Owners and/or managers that can’t get out of their own way. They are stubborn, risk averse, conflict averse (need to be liked by everyone), perfectionists, greedy, self-righteous, paranoid, indignant, insecure, etc.
  • Owners and/or managers not taking enough participation in the accounting/bookkeeping side of the business. It’s critical that the owners and managers are very involved in the pulse of the business including the income, expenses, profit, and loss.
  • Owners and/or managers more closely involved with front-of-house or back-of-house versus overall focus. This can be seen as favoritism, or worse lack of knowledge in that particular area. A manager that is perceived to lack knowledge in the area he manages (which would be all areas if you’re the owner) can be huge cause of disengagement in employees.

Changing your own behaviors and that of your managers can be one of the most difficult aspects of owning a business. Start by recognizing the behaviors or actions and work from there.

  1. Disgruntled employees

Herein lies one of the most elusive aspects of business. And it’s not just disgruntled employees, but all variety employee issues. And if you fall into the dysfunctional management category above you might not even realize you have disgruntled employees.

  • Disgruntled employees
  • Unengaged or dispassionate employees
  • Untrained or insufficiently trained employees
  • Unchallenged and/or over-challenged employees
  • Under-utilized and/or over-utilized employees
  • Inability to hire or attract qualified employees (and in some cases any potential employees at all)

So there you are. Based on these five categories of potential reasons, even if your business is doing great, you may need to reflect potential areas of concern. It doesn’t hurt to consider the potential hazards presented here and do some analysis and planning to make sure you are ready when and if these issues pop up. Feel free to use our EDITOR process model to assist you in determining if you have any of these potential problems and developing a plan of attack to stop “failure” from happening to you and your business.

Mahalo and much success,

Lynn Herkes

WOWSuccessTeam

 

References

Goltz, J. (2011, 1 5). Top 10 Reasons Small Businesses Fail. Retrieved from New York Times.

Pofeldt, E. (2015, 10 13). 11 Common Reasons Small Businesses Fail. Retrieved from CNBC.

Thorpe, T. (2014, 7 17). The Top 5 Reasons Small Businesses Fail. Retrieved from Inc.

Wagner, E. T. (2013, 9 12). Five Reasons 8 Out of 10 Businesses Fail. Retrieved from Forbes.

Zimmerman, E. (2011, 1 5). How Six Companies Failed to Survive 2010. Retrieved from New York Times.

 

 

About Lynn Herkes

Lynn Herkes has over 26 years experience and education in customer service, production, process improvement, quality control, and engineering. She has a broad industry background including aerospace, tourism, travel, hotel, restaurant, property management, customer service, equestrian training, scuba instruction, business and project management, operations, and ownership.