The Real Reason Small Businesses Fail and Succeed – Part 1

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Failed buisness One of the big advantages CPAs have working with small business owners is that we get to learn what makes them profitable and what makes them fail—without losing any of our own funds.  Not only that, but we are also business owners. We face many of the same opportunities and challenges that other small business owners face.

So what have I learned?  Well for starters, launching a small business is risky, and the chances of building a successful business are small.  According to the Small Business Administration (SBA), over 50% of small businesses fail in the first year and 95% are out of business in the first five years.  Of the ones that survive past five years, less than 1% reach a level that allows the business to survive the retirement or death of the founder.

This is a statistic that many of us have run across before.  But very few of the articles that quote these statistics actually go into detail as to why they fail. The following are the top 25 reasons I have seen for small business failure:

  1. Choosing a business in an industry that just isn’t very profitable.  You may love the business, but it is easier to pick a niche in a hot industry with customers eager to buy.  Dan Kennedy said it best when he said, “…the most important ingredient for a successful restaurant is hungry customers.”
  2. Not having actual hands-on experience in the industry before opening the new business.  The first question I ask someone who comes to my office and says they are opening a new business is, “Tell me what experience you have in this industry?”  Just about 100% of the business owners who had none before opening failed!  Go work in a restaurant before you decide to invest $250,000 in one.
  3. Unwillingness by the owner to take responsibility for everything that is not working in their business.  You created this business.  Anything you don’t like about your business, you caused or allowed to happen.  So take responsibility and decide to change what you don’t like.
  4. Poor management skills by the owner.  There are very few born entrepreneurs and there is no job that really prepares you to be the boss.  You will have to learn on the job. In today’s information age, there is no excuse for not learning management skills.
  5. Lack of necessary effort by the owner. They often don’t understand that they are not in a 9-to-5 job anymore.  If you want a 40-hour work week (or even a 50-hour week), don’t start a small business!
  6. Unwillingness of the owner to be a continuous, lifetime learner.  In my lifetime I have had to completely reinvent myself and my business at least six times.  No business model will produce a profit without adjustment.
  7. Failure to have a business and marketing plan.  Business ownership proves the saying, “Failing to Plan is Planning to Fail!”
  8. Inadequate cash reserves.  In small business, CASH IS KING!  If you make a profit but run out of cash, you will have no choice but to close your doors.
  9. Failure to truly understand their customers’ wants and needs. This also includes not understanding what triggers a customer to buy.  What you think the customer wants is totally immaterial.  The only thing that matters is what your customers think they want.  Never stop talking to them!
  10. Lack of marketing & sales skills.  A business without customers is called a hobby.  This is an area that seldom comes naturally to most business owners.  But, unlike when I opened my business, there is tons of information available on the web and many online coaching programs can help you improve your sales & marketing.
  11. Failing to price your product or service correctly.  Too high, and you may not have enough customers. Too low, and you may not make a profit.
  12. Failure to anticipate or react to changes in the marketplace, competition, or technology.  Change is constant.  Adapt or die!
  13. An overdependence on a single (or a few) customers.  If you have one or two customers that represent 90% of your sales, you don’t have a business—you have an outsourced job.
  14. Uncontrolled growth.  Too much of anything is a bad thing.  Growth without planning and systems is a guaranteed way to fail big.
  15. The owner believing they can do everything themselves.  If you want your business to grow, you must be able to create economies of scale.  This means you must become good at delegating and managing your employees.
  16. Poor customer service.  Sales and marketing gets you the first sale.  Customer service gets you repeat sales.
  17. Unqualified or untrained employees.  Employees are one of the major expenses of almost every small business. Hiring bad employees or failing to train the good ones is a quick way to fail.
  18. Failure to seek outside professional help.  Every professional athlete has a coach.  So why do so few business owners feel they could benefit from one?
  19. Employee fraud.  Fraud, especially by bookkeepers (just Google bookkeeper fraud) is a major cause of small business failure.  Get your CPA to review your internal controls.
  20. Poor location.  This is particularly true in retail, restaurants, and bars.
  21. Poor inventory management.  Excessive inventory ties up cash and leads to old unsellable inventory that must be written off.
  22. Not collecting your receivables.  It’s not really a sale until the money is in the bank. (See our article in this issue for tips on reducing receivables.)
  23. No systems.  It’s very hard to manage people.  But it is very possible to manage well thought-out and designed systems.  Systems allow you to deliver a consistent experience to your customers.
  24. Over-borrowing and not matching the correct loan type with your need. Closely related is not borrowing enough.  Be sure to read our interview with a commercial loan officer in this issue for many more vital tips.
  25. Failing to innovate and introduce new products or services.  The quickest way to make a profit is to sell more products to your current customers.  If you don’t, your competitors might.

A review of the list shows that the key reason for business failure is the inexperience and lack of business knowledge by the owner.  The good news is that you can learn how to avoid all of these reasons for failure. (In fact, subscribing to this magazine is a great start.)

(Be sure to check out part 2 of this series where I discuss what business owners that prosper do differently!)