Why Small Businesses Fail: 3 things you need to know
Posted on August 21, 2013 by Shawn Kinkade, One of Thousands of Business Coaches on Noomii.
Business owners are hard workers, but unfortunately long term success requires more than just hard work - are you focusing on the right things?
About 1/3 of Small Businesses fail in the first 2 years, and just over half fail within 4 years (according to an SBA Study done in 2005 ). However that doesn’t tell the entire story. There are also lots of examples of businesses that are still in business but aren’t really making it.
I ran across an interesting article in Fortune Small Business that initially caught my eye because it was about a local Kansas City business. The article on ‘Why Small Businesses Fail ‘ is about a home furnishings boutique in Prairie Village called the Curious Sofa.
Here’s the part from the article that I thought was really interesting:
Dusenberry’s financials explained clearly why her business has potential – and why she’s in trouble….But here’s the thing: Her statements show that she’s lost money eight years in a row.
Every year, Dusenberry said, she told herself that she was going to work harder and sell more stuff, but working harder doesn’t fix a broken business model.
Working hard, loving what you do, and having a skill or product that other people want enough to pay for are all part of the puzzle, but there are other things that are even more important and if you don’t figure them out, it can be a painful journey.
What are the missing ingredients?
Every business is different, but I think you can summarize the biggest missing ingredients into 3 areas – People, Systems and Planning.
People
One key area that small business owners often overlook is the importance of the people around them – employees, vendors they buy from, advisers, people they network with – all of these have a huge impact on overall success.
If you’re not going through a thorough process for most of the people that you hire, you are probably destined for a rough ride. Small businesses don’t have the luxury of handling a bad hire – best case it’s an expensive mistake (to the tune of $30,000 or more depending on the position. Potentially it can sink your business.
Equally important are the people that you are networking with and getting advice from. If you are not routinely being challenged, receiving candid feedback and brainstorming with people that have a different background than you do, then you are not performing up to your potential.
Action Point – What are 3 things you could start doing to improve the people that you’re hanging out with or working with?
Systems
A system is a set of steps and procedures that you or your employees follow to get things done. You can (and should) have a system for how you order office supplies, how you market your company, how you create your product, etc.
The benefit of a formal written system is that you can easily get other people to operate the system once it’s created (so you can move on to other things) and by having it documented, it becomes possible to incrementally improve the system over time – which is where the real long term benefits come in.
I wrote a post last fall that spelled out how to get started with systematizing your business – it’s not rocket science, but it is amazing the number of businesses that don’t routinely use documented systems and just make things up as they go.
Action Point – What are 3 processes that you or your team do routinely but aren’t documented? How could you get started implementing some system improvements?
Planning
Planning likely should have come first in this list. The single biggest issue with the example above is the business didn’t have clear plan on how they make money. It can be time consuming, but you need to develop a Profit Plan, the answer to how to make money in your business. If you can’t plan it out on paper, chances are you won’t be able to do it in real time with your hectic business.
You should be able to clearly state your plan for how much money you are going to make (and spend) in the next 12 months and just as importantly, where that money is going to come from. If you’re in early growth phases or if you are launching a new product, then you may have to guess more than your comfortable with, but a guess is better than not having a plan at all.
The other important point of the plan is to remember is that it’s not how much you make, but how much you keep that really matters. You might have great revenue coming in, but if that’s not translating to profitability, you are still destined to fail (it just might take longer).
Action Point – Can you create a monthly projection through at least the end of the year that includes costs and revenue (and where that revenue is coming from)? If not, what would it take to do that?
What are other key ingredients to business success? Do these match up with your experience?
Shawn Kinkade Kansas City Business Coach
