Why Most Small Businesses Fail - and What You Can Do About It

In the introduction to Michael Gerber's book The E-Myth Revisited, the author states that within the first five years, 80% of all small businesses will fail. Of the ones that remain, 80% of those will fail within the next five years. That means that almost 96% of all small businesses will fail within the first 10 years. In other words, only 1 out of 25 businesses still exist after a decade of operation.

What are the most common reasons why small businesses fail? One reason is that many businesses give up and close their doors without allowing the business enough time to develop a proper revenue stream. Know that the majority of new businesses will not make a profit within the first year of their existence. One must account for that before considering going into a particular business venture, and have deep enough pockets that they can survive in the interim until the business is in the black.

Perhaps the largest reason why its many small businesses fail is that they cannot attract enough customers. Without a customer, none of the other processes associated with a business ever takes place. Advertising, marketing, warehousing, distribution, supplier agreements, research and development -- none of these processes mean anything if the business cannot attract enough leads and send customers through their door.

One might call that the 'Secret Agent' business model. Attracting potential customers means finding the right types of (i.e. targeted), and enough, traffic - in short, it's very much a numbers game. If no one knows you're out there, how are they expected to buy your product or service? Learning to promote and advertise your business in a cost-effective manner is essential. As a business owner, you must know how much it costs to attract new customers as well as the cost to retain your existing customer base, and how to maximize the revenue streams from each. It can cost a business six or seven times (or more) the amount to attract new customers as it does to market to existing ones. Treat every new customer as a potential "customer for life", and act accordingly.

While a good mission statement is essential, the practical day-to-day operations require that a business is always moving. If your business stays the same, while all your competitors are moving forward, adapting, integrating, and actively seeking new methods and markets, you'll be left behind rather quickly. This is especially true when marketing through the internet - which almost all companies should be doing.

Virtually every business, whether 'bricks and mortar' or not, requires a website as an extension of your business' face to the customer. Think of it as your company's front door. For many customers, it is the first interaction they will have with you. You will never get a second chance to make a good first impression, so make sure that your website sends exactly the message you want to portray of your business to your customer - and does so within the first five seconds. The 'bounce rate' (the rate at which visitors to your website leave once arriving - oftentimes never to return) is much higher if your site is poorly constructed, has only marginally useful content, and is hard to navigate.

If you have a physical business, or are drop shipping products on the Internet, one of the biggest impacts you can make on your bottom line is to negotiate and source the best prices with your suppliers. Even small decreases in purchase price can have a large effect on your net margins.

Location. For a traditional business, this means a physical address, which is well situated and not in an area of close proximity or over-saturation with competitive vendors (your competition). For consumer products, the business must be in a prime position to receive enough foot traffic, usually close to a main highway, near residential centers, or in the mall. On the Internet, your location is combination of factors including your website URL, your on-page and off-page search engine optimization (SEO), and the natural and paid traffic sources you use to send customers to your site.

While revenue is important, cash is definitely King, and this is a deciding factor as to whether many businesses stay afloat or not. If your accounts receivable are dated at zero days (or less) while your accounts payable are net 30 (or better), you are in a superior position to make the money you receive work for you.

Another reason why many small businesses fail is that there are market differences in the skill sets required to be a CEO versus a COO. The founder and visionary of a company may not necessarily be the most suitable person to run its day-to-day operations. An owner should know their particular strengths and weaknesses, and hire around them accordingly.

Leverage your time and your assets well. Break down your business activities into specific parts and tasks based on their potential for revenue generation. A business owner's time is always better spent on the activities that have the highest revenue producing dollar per hour, and should outsource all remaining activities to others. This generally means the owner will be focusing more on lead generation and conversion (and perhaps R&D) depending on the market one is operating in.

Another key factor in successful businesses is those that have well-defined systems in place. If a process can be duplicated, there should be a system that addresses that process which can be easily and readily learned by the employees. These systems can be taught, providing workflow continuity and cross training among one's employees, and it minimizes the impact that occurs through succession or attrition.

Learn what to manage, what to delegate - and more importantly, what not to micromanage. A well-trained, competent employee will free up the business owner's time to spend on other more important activities.

If you keep this in mind when starting or running your business, plan for the unexpected, have contingencies in place, and manage your cash flow efficiently, you will have a much greater chance of succeeding in the long run. The key is not to give up, keep moving forward, model your business after proven successes in your market, and set realistic goals and milestones that are attainable. Once you reach those milestones, don't forget to celebrate them properly -- for life is as much about the journey as it is about the destination. With the right approach, you'll soon find that your 'luck' increases many-fold. Above all, it's your business - have fun with it!

Source: Michael Gerber, The E-Myth Revisited, ISBN 0-88730-728-0