The statistics on small business failure vary widely depending on the report and the source. Some say nine out of 10 while others put the first year failure rate as low as 20 percent. As a small business owner, you may not care what the actual number is as long as you are not one of them. However, it is a real threat and there are commonalities in why it happens. Here are my top five.
1. They run out of cash. This usually happens because they do not have adequate funding from the beginning. Many owners underestimate how much it will cost and how long it will take the business to become profitable. Couple that with issues such as slow receivables, slimmer profit margins and higher expenses than predicted and initial operating capital can rapidly disappear. Plan for the worst case and have 1-2 years of operating capital set aside.
2. The market for the product or service is not what they expected. This could be that they were wrong about the target market, that what they are offering is not different from competitors or that there just is not a market for what they are selling. This indicates a lack of planning so be sure to do extensive market research before jumping in.
3. They do not know how to market. The very best product or service will not sell if customers do not know about it. Businesses can no longer expect customers to come to them so they need to put themselves out there to be found. Having an online strategy is critical even for a brick and mortar business, yet few business owners are savvy enough to do it properly. Plan to pay for this if you are not.
4. They do not have the right team. Owners certainly have the vision, which is why they started the business. However, that does not mean they have all of the skills and knowledge to run a profitable business. Create job descriptions for each role or necessary business function. Hire people for what you cannot do and to complement what you can.
5. They try to grow too quickly. Many successful businesses fail because they are successful and try to take it to the next level too soon. Just like starting, expanding requires capital. Funding expansion through current operations is risky as it can put the business into a cash flow crisis.
All of these can be summed up in three words – Lack of Planning. This is the real reason many small businesses fail. A thorough business plan flushes out all of the reasons a business may not be successful. It allows you to make mistakes on paper rather than with your livelihood. Business plans are not just for start-ups. Think about some of the Fortune 500s like Apple, GM and AT&T. How likely is it that they just figure it out as they go along? They do not and neither should you. The most successful businesses that I work with have a solid plan that is frequently updated as the business and market conditions change.