Why Small Businesses Fail

It is common cause that a new small business owner will have a better chance of success if he or she is aware of the primary causes that contribute to small businesses failures. It sound like a simple matter of consulting a trusted publication or two and confirming the reasons cited by doing a quick internet search on the topic.

The Data

Assessing ten different publications (see reference at the end of the article for the links) about the reasons why small businesses fail, this author was faced with 83 reasons cited. It is unrealistic to expect any person to remember this large a number of reasons, much less so a new entrepreneur who wants to focus on getting the company off the ground.

Methodology

In order to reduce the reasons cited to a realistic number the reasons were tables to discover similarities. The reasons with the same fundamentals were combined and then listed. Through this process the number of reasons could be reduced to fifteen. It is true that this number is much more manageable, however the author refined the data further by determining the number of time that each of the categories appeared in the table as listed by the various authors. The number of times a particular failure reason appeared was used to list them in order of apparent importance.

In this article the top seven reasons for failure will be discussed in order to clarify these. The eight remaining reasons that only appeared in the table three times or less will only be mentioned without providing any further detail as it would appear that they may have limited value in the eyes of the listed publications.

Reasons for Failure

The reasons for failure will be discussed in sequence of priority as determined in the study methodology.

1. Managerial Skills and Expertise

The most sited reason for small business failure is managerial skills and expertise. All ten of the references noted that this is one of the primary reasons for small business failure. It is a fact that small business entrepreneurs often do not have suitable and sufficient business and management know-how. It is a fact that most such entrepreneurs have a high level of technical skills but lack skills in business areas like finance, contracts, human resources, administration, and production. Not having these skills in itself is not necessarily the end of the road, but not recognizing what they do not have a particular skill set will inevitably result in the business and its owner having to face disaster.

If one looks at the reasons for failure that follows, it becomes abundantly clear that managerial skills and expertise actually plays a bigger part than first meets the eye as each one of the other reasons for failure can in some way or another be traces back to a lack in managerial skills and expertise. If any new business owner wants to increase the chances for success this is where he or she should invest in.

2. Planning

Eight of the ten sources cited poor planning or a lack of suitable planning as a reason for small business failure. Doing planning does not guarantee success but it does limit the possibility of not reaching a goal.

It is said that planning is a look ahead and mapping out of the course of action to be taken. In the classic 1865 novel written by English author Charles Lutwidge Dodgson loosely titled Alice in Wonderland the Hare told Alice "if you don't know where you're going, any road will take you there". This is as true in business as it is in any dimension of life.

Planning should be seen as the systematic preparation of the successful conducting of business activities. Planning is not just a superficial listing of activities or a checklist but rather a detailed program that includes timelines, resources and clearly measurable deliverables that will result in the success of the business.

3. Focus

Eight of the ten sources cited a lack of business focus as a reason for small business failure. Having the correct business focus will largely contribute to the possible success of a new venture, just as it will do in any other business.

An appropriate business focus will bring together the correct activities at the correct time to ensure that the activities are aimed at achieving the business outcomes.

With the correct focus the new business owner will not place all his or her eggs in one basket nor will they approach the business as a hobby. Having the correct focus will also place the entrepreneur in a position to control unexpected growth, limit undesirable overexpansion and prevent over-diversifying any one of which may result in business failure if it is not properly controlled.

It should be clear that growth, expansion and diversification are warranted but only after thorough evaluation, study and examination in order to identify the value that the growth, expansion or diversification will add to the business. Care should be taken to ensure that the correct balance is maintained given the resources available to the organization.

4. Sales, Marketing and the Market

Eight of the ten sources cited a lack of sales and marketing and/or not understanding the market as a reason for small business failure. It is true that marketing and sales plays a significant role in the success of any business, the challenge however is to deliver the right quality product or service at the right time to the selected target market.

This essentially translates into knowing the value proposition of the new business. A value proposition can be described as "a clear statement of the tangible results a customer gets from using your products or services". It is defiantly worthwhile for a new business owner to spend time defining the value proposition that the new business will offer to its defined target markets. This will not only ensure that the focus of the marketing and production will be aligned but will probably contribute significantly to the company culture that will become critical as the organization grows. The more specific your value proposition is, the better your sales and marketing results will turn out to be.

In order to ensure that a better chance of success is created issues like sales techniques and customer service should be high on the list of priorities.

5. Capital

Six of the ten sources cited capital and the capital structure of a new venture as a reason for failure. The requirement to structure the capital of a company correctly is a multifaceted and complex dimension that is best left to the professionals.

This author has published an article on Yahoo Associated Content providing a description of some of the most suitable sources of capital for starting a new company and will thus not go into detail about this aspect here.

When analyzing the failure of businesses one discovers that a large percentage of these carried way too much debt. It is also true that new business ventures tends to pay too much for debt, resulting in the erosion of the profit and potentially making it a risk to invest in. This cycle can continue until the business fails prematurely as a result of a lack of capital to operate.

In order to limit this risk the new business owner should ensure that credit arrangements, inventory management and investment in fixed assets are correctly and diligently managed by somebody with the correct skills and knowledge to understand the consequences of slipping in these areas.

Some business owners also have a bad habit of utilizing business funds for personal use "because of the tax benefit". Despite this being illegal in most countries it is a sure way to sink a new business as the control over the available capital to run the company is completely lost the first time the owner does it.

6. Cash Flow

Six of the ten sources cited the lack of sufficient cash flow as a reason for failure in a new business venture. The primary problem with not having sufficient cash flow is that accounts cannot be paid on time which in turn results in the reputation of the frail new company to be tarnished. Soon no vendor will be willing to provide raw materials for the company to continue to operate.

It will be wise to learn to pay strict attention to the company cash flow and to ensure that careful records of all incoming and outgoing cash are recorded in the company books. It is important to ensure that there is a net positive flow of cash into the company. Debtors require to be funded by the company and growing non-cash sales to fast is often cited as the reason for a negative cash flow.

Another cause of a negative cash flow is overspending, especially on non income generating items. These may include top end desks and chair or even fancy delivery vehicles. The new business venture owner should understand that, despite the fact that he or she will be able to justify every expense, the lenders are only interested in seeing their loan being paid on time.

In cases where it is possible it may be a good idea to build up a reserve fund to prepare for volatility in the markets or costs that can go out of control over which the company has no control.

7. Location

Amazingly only four of the ten sources cited incorrect location as a reason for failure in a new business venture. This can probably be attributed to the move towards digitization and globalization where the internet and e-commerce is playing and increasing role in new business.

Traditionally location was deemed to be the most critical to the success of a new business. This of cause depends on the nature of the business and the selected target market. Is some sense the criticality of location may still be true as not having a website with an e-commerce capability may be construed to be in the wrong place.

In the more traditional sense the new business owner should not allow an inexpensive lease be so tempting as to start the new venture in the wrong location. Some of the key factors that need to be taken into account include the location of competitors, the accessibility of the location as well as the technical suitability and the style of the venue.

Other Reason for Failure

The references used to do this analysis also mentioned record keeping, competition, entrepreneurial excitement and burnout, vision, staffing issues, website, quality control and external factors such as economic shocks as potential reasons for failure. Most of these were reported by only one or two sources.

Conclusion

When one looks at the list of reasons for failure it is easy to understand why the chances of success of a new small business are multiplied many fold when a franchise is used to launch the business. It is a fact that most reputable franchises are based on eliminating these identified reasons to failure.

It is the considered opinion of this author that businesses do not fail without any warning. It may often appear that way, but new business owners that feel this way normally attended to the incorrect issues and thus missed the warning signs.

References

http://smallbusiness-bigresults.com/whybusinessesfail.htm

http://usgovinfo.about.com/od/smallbusiness/a/whybusfail.htm

http://www.allbusiness.com/business-planning-structures/business-plans/1440-1.html

http://www.associatedcontent.com/article/5901004/common_reasons_why_small_businesses.html?cat=3

http://www.businessknowhow.com/startup/business-failure.htm

http://www.captureplanning.com/articles/69960.cfm?

http://www.evancarmichael.com/Business-Coach/223/Why-Small-Business-Fail.html

http://www.p2w2.com/blog/index.php/top-5-reasons-why-small-businesses-fail/

http://www.suite101.com/content/why-small-businesses-fail-and-trends-in-small-business-a330859

© Carl Marx