Why Small Businesses Fail

Every year, tens of thousands of small businesses fail.

They may stop working for a number of reasons but usually it boils down to one: they are on the verge of bankruptcy or can no longer meet their financial obligations.

Because so many business closures are voluntary - a final concession to the inevitability of collapse - it's impossible to get an accurate figure.

All those hopes and aspirations end in the turmoil of unpaid debts, abandoned employees, and an overpowering sense of failure for the owners.

Definition Of A Small Business

Before we look at why so many small businesses fail, we should first define what a small business is.

  • The first characteristic of a small business is that it has few employees, usually less than 100. Most small businesses are run by one or several owner/managers with skills in one or two specific areas. For example, a plumber may decide to open his own business based on his years of experience in that field. While he obviously has the background to offer a professional service, he may not have skills in business management or marketing, both of which are equally important in making the business a success.

  • Small business owners tend to keep a tight rein on their businesses. They rarely hire or consult with professionals in those areas where they lack expertise, such as accounting, finance, sales, marketing or personnel management. Along with the lack of business management skills, this is the main reason why so many small businesses fail.
Other features common to small businesses include:
  • They are usually run by a small management team with multifunctional roles (e.g., the owners service customers, manage staff, write ads, oversee the accounts and sometimes complete the tax returns).
  • The owners exert a strong influence over all aspects of the business, including areas where they have no expertise.
  • The business is often built on labor-intensive work with a low reliance on technology.
  • The business offers a narrow product range that has a limited market share.
  • The business is run by a close and loyal work team.
  • There is inadequate planning and a lack of systems in each department.

A Home-Based Business

Many business owners see a home-based business as a dream come true and it works well for a great number of them.

On the plus side, there are major cost savings:

  • There is no additional rent required
  • An additional telephone line is optional
  • No additional power is necessary
  • There are no daily travel or commuting costs
  • Professional wardrobe costs are minimized

On the negative side:
  • There may be a cost for council approval and licensing. This usually depends on whether you have customers visiting your home office and thereby creating additional traffic on a residential street.
  • If there is customer contact at home, the customers may perceive the business as less professional.
  • There's a tendency to get distracted by non-business activities or family members.

Potential Problem Areas

Here are the key reasons why most small businesses fail. If you recognize one or more of them as pertaining to your business, take the time to step back and plan ways to counteract these potential time bombs.

1. Psychological Issues

Use the wealth mindset techniques to eliminate these:

  1. The owner's influence is too controlling and/or oppressive.
    What drives this behavior is usually an irrational fear of the business disintergrating if you don't keep a tight rein. To counteract this, hire competent, professional staff, set up some well-designed systems, and learn to let go and trust in what you've designed. You should be able to leave the business for substantial periods of time and find it running smoothly when you get back. Otherwise, you've just bought yourself a job rather than created a business.

  2. The owner's lack of expertise in business management can set the business up for failure.
    This suggests a fear of feeling stupid if you admit you don't know how to do something. Take a deep breath, admit your shortcomings and hire or consult with a professional.

  3. The owner's reluctance to hire or consult with specialists (accountants, lawyers, personnel managers, etc.) can sabotage the business's chances of success.
    Same as above. This behavior can also indicate the 'oldest child syndrome', where a person feel it's their responsibility to take care of everything that needs to be done. Give yourself a break and recognize that it's not your job to take on all the roles in the business.

    If finances are a consideration in not paying for professional advice, rework your budget to allow for those expenses. You will pay far more in lost opportunities or business failure if you don't take advantage of other people's expertise.

    Professionals will help you set up systems to streamline each procedure in your business, thereby saving you both time and money.

  4. Trying to wear too many hats can minimize the owner's efficiency.
    See the last two categories. You might also need to confront your fear of trusting other people to get the job done. You can either hire people with excellent qualifications or give all new employees a three-month trial. And if you discover a hidden fear of feeling indequate around competent people, use the mindset techniques to dismantle it.

  5. Poor accounting systems can run a business into the ground.
    Avoiding areas of the business you dislike is a recipe for disaster. Except for devotees, we all hate accounting. So admit that you do and then pay someone who loves numbers to keep your books in top shape. A professional accountant can set up your systems or recommend a preferred accounting software package.

    Take time to look over your books on a monthly basis, especially your profit and loss statements. You need to keep track of how the business is performing. If fear drives you to avoid this, use the mindset techniques to move through it. If you can't face the bookkeeping, you shouldn't be in business.

  6. Poor customer relations and people skills can destroy a business.
    As owner, you set the tone when it comes to customer relations. In past decades, the most popular business slogan was, “The customer is always right!” Today, most employees seem to take personal umbrage at any kind of customer complaint and will respond vehemently to prove the customer wrong. This is a self-sabotaging business philosophy.

    Train your sales staff to reframe their view of customer service:

    • Define their role as helping your customer find solutions to their problems.
    • If there's a problem with the product or service, train them to see the situation from the customer's point of view. Avoid an 'us' and 'them' mentality.
    • With product sales, offer a 100% money back guarantee if at all possible, with no questions asked.
    • Remind staff that without customers, they won't have a job and you won't have a business.

    The same principles apply to dealing with suppliers and other people you interact with on a regular basis.

  7. Too much focus on the product rather than the customer is counter-productive.
    Give your customers as much positive attention as you do your products and/or service. Pay attention to their needs because they are your market. This may inspire you to create a new product or modify an existing one, thus adding to your market share and profits.

    Nurture your customers so that they buy from you again and again. Consider investing in a small range of promotional products such as pens, calendars, etc. Offer them to your clients as tokens of your appreciation. Or send flowers to important clients or suppliers when the situation warrants it.

  8. Intuitive decisions don't always work for the business.
    Despite the fact that business blueprints rarely come to fruition exactly as anticipated, planning is still the key to business success. When you don't have a plan, you tend to make decisions 'on the fly'. While you will need to make a certain amount of instantaneous decisions in the day-to-day running of your business, they should flow from an overall business plan.

    If you have an aversion to planning, you need to counteract it or hire a professional. Otherwise, your business is unlikely to succeed.

  9. Reactive responses, especially to emergencies, are detrimental.
    Part of your planning should involved hypothetical responses to potential problems. Deal with any fear or reluctance you have towards anticipating potential problems.

  10. There's a danger in being task oriented rather than vision oriented.
    Again, you need to plan ahead and devise a vision for your business. You must be able to envisage where you want it to take you.

  11. Too many owner idiosyncrasies can weigh a business down.
    Idiosyncrasies are part of what makes people individuals but they don't belong in the business arena beyond a certain point. You can promote the image of a 'colorful' business owner, but if your idiosyncrasies prevent you from doing business in a professional manner or alienate your staff, customers and suppliers, then you need to reconsider your behavior.

    Take a look at your attitudes towards other people. Are you trying to see how far you can go before people reject you? Do you believe you should be able to 'be yourself' and to hell with everyone else? Are you refusing to see yourself objectively and take responsibility for the effect of your behavior on others?

    If any of these apply, you need to dismantle them through using the mindset techniques. They don't belong in the business arena and they'll certainly detract from the quality of the rest of your life. It's time to dump that kind of baggage if you want a successful and fulfilling life, in business and otherwise.

  12. Reluctance to take risks can be counter-productive.
    Fear is one of the most paralyzing emotions. If you want success on any level, you'll need to conquer fear. Take a look at your three biggest business fears and use the mindset techniques to eliminate them.

  13. A strong desire for independence doesn't make a businessman.
    Independence can work against you if it prevents you from asking for help, hiring professional staff or consultants, or performing any other task that is essential for running a successful business.

    The desire to avoid working for an employer is an away from motivation, as opposed to the towards motivation necessary for creating a practical business plan. Wanting to be your own boss is not enough motivation to ensure success. You need to have a towards goal as well, a business idea that really attracts you. A combination of the two types of motivation works best. Again, beware of buying a job versus starting a business.

  14. Hiring family is often counterproductive.
    Don't feel obligated to hire friends and family members in your business. Make it a policy not to do so unless you are willing to destroy some of your closest relationships.

    Instead, hire the person most qualified for each position. If a family member has an area of expertise you'd like to tap, hire him or her as a consultant on a casual basis.

2. Practical Problems
  1. The owner's limited credit rating can affect the business's chances for growth.
    This is a strictly financial problem you can solve through creative thinking. You can find ways of raising additional capital through government grants, personal loans, a second mortgage on your house, or sourcing venture capitalists.

  2. Low-tech labor-intensive work slows down the rate of growth.
    One of the advantages of changing your thinking from buying a job to running a business is that you start thinking in terms of freeing up your time. Once you put some systems in place so the business can run without your continuing presence, you can start looking into ways of improving the systems you have. You can investigate the technology used by your competitors and also any recent developments that might not yet have hit the market place.

    If funding is a problem, consider the capital raising activities in the last example.

  3. Limited products can slow chances.
    The same applies to your product line. You can spend your time improving your current products as well as developing new ones to increase your market share.

To summarize:

Over 90% of business failures occur because of managerial inexperience and incompetence.

Consequences Of Failure

The major consequences of the small business failure rate are more far-reaching than the obvious loss of capital and time:

  1. There are negative psychological affects on the failed business owner/managers. People often blame themselves for the failure of their business, which results in a loss of confidence, loss of self-esteem and a subsequent fear of failure. It may take many years and many attempts at creating a new business before they regain that lost confidence, or they may not regain it at all.

  2. Many former employees of the business are forced to join the unemployment pool. Unless they find new jobs relatively quickly, this may lead to financial hardship and the resulting stresses in their relationships and/or family life.

  3. Investors and unpaid creditors will incur financial losses.

  4. The market place will lose potentially useful, specialist and/or innovative industries, products and services. The economy will also suffer as small businesses currently contribute 43% of the total gross domestic product.
So take some time, either before you start a business or once it is up and running, to anticipate potential problem areas and take the necessary steps to correct them. Because your business takes up a substantial portion of your time, you need to ensure that it's an enjoyable, challenging and rewarding activity, with stress and frustration kept to a minimum. Anticipating problems and heading them off in advance will help keep things flowing. Make sure you take steps to eliminate those pitfalls responsible for the fact that so many small businesses fail.

Your Next Step:
  1. If you haven't downloaded this yet, get a copy of Rich Schefren's Business Manifesto.

  2. If you're interested in an online business, go to the Internet Business page.

  3. To learn about the various business structures available, go to the Business Structures page.

  4. Visit the Amazon web site for books on how to run a successful small business:

Disclaimer: This site is purely educational and we make no claims or guarantees with regard to the information presented. Please consult a certified NLP practitioner for individual coaching in the use of NLP techniques. We strongly advise consulting a financial industry professional before embarking on a wealth creation journey.

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