If you don’t already know, the failure rate of small businesses is huge. According to the US Small Business Administration, less than 50% of small businesses survive their first 5 years and only 1/3 of those will still be around after year 10. So, how can you beat the odds and reduce the chances your small business might fail before you even gain traction with your business idea?
There are some problems that you need to think about and work on before you get your business off the ground. Problems range from funding to planning issues and any one can stop you in your tracks before you even get started. You don’t want your plans to be derailed by these issues, so it’s worth finding out more about them now and taking steps to deal with these problems before you take the step of starting your business or taking it further than you have already Keep reading to find out more about a few of these specific problems.
What is a small business?
The US Small Business Administration defines a small business as a business with revenue below $5 million, but that covers a lot of territory. Small businesses are the fuel that runs the economy since most new employment comes through small and midsized businesses. Sure, a large business may employ thousands of workers, but in terms of new employment, large businesses mostly just replace one worker with a different worker rather than hiring for new positions. Also, recognize that small businesses are much more numerous than large businesses so if a small business only hires a new worker or two, the impact on employment is vast because there are over 30 million small businesses in the US alone that represented a net gain of 1.9 million new jobs in 2018 alone. Thus, your success as a small business owner impacts not only you and your family but the entire country.
In addition to size, we further divide small businesses by the length of tenure (how long they’ve been in business), their industry, and the main goal of the business (lifestyle versus startup). The chances a small business might fail depends on all these factors. For instance, I’ve worked with multi-generational small businesses in both the US and EU facing failure because they didn’t keep up with changes in the external environment, such as technology, political/ legal, or consumer tastes.
Sometimes a small business might fail because they didn’t jump at opportunities for growth when they had a chance. For instance, I found a baker in Spain who lacked the skills necessary to expand into other regions beyond the EU despite demand evidenced by tourists ordering his goods once they got back home.
Why your small business might fail
A number of reasons explain why small businesses fail. The biggest challenges facing small businesses, challenges they must meet or face ultimate failure come from 4 basic sources:
In the next sections, I go into more depth on each of these challenges in no particular order.
1. Financial issues
If your business starts spending too much too soon, you face cash flow problems and more businesses fail due to cash flow than from poor sales.
When you have a bit of startup capital in the form of your own money (often called family and friends funding, although funding may come from maxing out all your credit cards) or maybe a new business loan, it’s easy to spend all the money before you know it. Once the money is gone, your business is dead in the water either scrambling for more capital (and who wants to invest after you run out of money) or closing your doors. Ensure you have some financial breathing space by planning for unexpected expenses and have a minimum of 3-6 months of operating expenses on hand before your start.
Going into debt causes huge amounts of stress and pressure. And getting back out of debt is never easy. There are options out there though. Is debt consolidation worth it? For some people, debt consolidation offers a solution to short-term financial needs. In other cases, getting an advance on your account receivable (the amount owed to your business by customers– called factoring) is just what you need to manage a financial shortfall. Whatever solution you choose puts you behind the 8-ball and forces solutions to repay the debt.
2. Planning issues
A business plan is a must when starting a small business and you must develop a robust plan before opening your business not just something sketched on the back of a napkin or conjured in your head. Even once you start business operations, you must update your plan frequently (at least yearly) to adequately plan for the future.
A caveat about business planning is needed, as the plan is designed to guide you as you make business decisions, not tie your hands. The founder of Adobe tells the story of his early days with the new company. He and his partner planned to sell a bundle of their new software (Adobe Acrobat) along with a computer and printer so buyers got full advantage of the software. Yet, initial buyers, like Apple, didn’t want the bundle because they had their own hardware. They only wanted the software. The founder turned them away until his business advisor (appointed by investors) pointed out his error. And, we all know how that decision played out.
Effective business plans contain the following:
- An external analysis sometimes called an environmental scan of the 5 outside elements — economy, technology, political/ legal factors, competition, and cultural elements in their target market
- Internal scan of the firm, its capabilities, its challenges, its products, etc
- Goals and objectives
- Plans for achieving the goals and objectives created
- Monitoring plan to measure progress toward goals and objectives
- Contingency plans, since something always goes wrong
- Action plans to guide the implementation of each activity planned
3. Marketing issues
Trying to be everything to everybody often results in not satisfying anyone. Instead, businesses segment the population into homogeneous groups sharing common values, needs, etc that differentiate them from other groups, a process called segmentation. A business then determines which group or groups fit their business idea (called targeting) and works to cater their operation toward satisfying that group or groups, called positioning.
Among the reasons for segmentation, targeting, and positioning are:
- reduces competition since your company chooses a niche that’s different from the target market chosen by competitors
- a better fit to the needs, values, and lifestyle of your chosen market
- more effective messaging as you transform your message to that most influential to the specific target market in channels used by that market and in language similar to the target market
Recognize that consumers buy solutions to their problems. Work hard to identify and solve problems to avoid failure. Then, allocate sufficient marketing dollars to achieve your goals; building campaigns designed to match your target market.
4. Management issues
Managing a small business is never easy, except when you’re the only employee. Even then, you have to manage workflow and may find yourself overwhelmed with too much work. You need to hire new employees with complementary skills to help manage tasks so your business can grow.
You must build positive, collaborative, and harmonious relationships with your management colleagues; otherwise, your small business might fail. Conflicts within management teams are not uncommon but they are devastating if they lead to excessive in-fighting, lack of cooperation, and a lack of focus.
Providing your team with solutions to communicate effectively both between themselves and with your customers helps them stay on top of everything. Communication is key in any business – so make sure it’s as easy as possible.
Building collaborative relationships with employees start with excellent human resource management.
- Reduce role conflict by ensuring everyone knows their responsibilities and how other employees fit into the organization.
- Gain buy-in by involving employees in decision-making to the extent possible.
- Empower employees and give them ownership over ideas by giving them tools and letting them solve problems directly affecting their role
- Respect employees and reward them with both extrinsic rewards (pay, bonuses, etc) and intrinsic rewards (supportive environment, respect, opportunities for personal growth, and comradery).
Use these tips to guide you on your journey as a small business owner. By implementing this advice, you’ll reduce the chances your small business might fail.
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