It is well documented that the failure rate for small businesses and SMEs is staggering. By most estimates, 70% of startups will be operating in two years, but only 50% will still be operating in five years (U.S. statistics). Although these percentages might differ (plus or minus) to some extent depending on what website or report is reviewed, the end result remains the same. It is tough for small businesses to succeed especially in today’s environment and resulting economy. Failure rates internationally follow this same pattern being even worse in some countries.
Reasons for Failures
There are many reasons for business failures regardless of location. In searching the Internet, there are many common reasons such as:
- Bad location
- Lack of marketing research
- Weak business planning
- Management deficiency
- Customer and supplier issues
- Poor quality products and/or services
- Lack of financial controls
- Problems with teamwork
- Difficulties finding financial support
- Lack of training
In addition to the above factors, many reasons for failure consistently stand out more than others. Fortunately, for almost every weakness there is a cure. Improving upon these weaknesses can reverse the failure rate for a small business or SME and put it on a course to success.
As a business consultant or owner, be aware of the following weaknesses that are most prevalent and can have a severe damaging effect on a business:
1. Deficiency of Basic Knowledge
While many small business and SME owners know the technical aspects of their businesses quite well, they often lack the basic knowledge in all core functions necessary to operate a business through the various organizational life cycles.
It is this wide diversity of knowledge that is necessary for survival, success, and growth. If a business owner has limited knowledge only in the most basic functions of his or her business, then it’s time to either seek expert consulting advice or start learning all of the core competencies required to operate a successful business.
2. Understanding Strengths and Weaknesses
It is important for business owners to know how their business fits into the competitive landscape in which it operates. A business cannot improve if the owner does not understand the internal strengths and weaknesses of the business. Without this knowledge, it is also difficult to ascertain untapped market opportunities or recognize external threats that might hinder a business. A business cannot operate in a vacuum. Owners must take the time to understand the competitive landscape and how to make the most of it.
3. Lack of Cash
Small businesses and SMEs must have a sufficient amount of cash to operate, but many businesses simply operate day-to-day hoping for better results tomorrow. Owners and managers must know what products or services bring in the highest profit, what expenses are out of line, and whether the business will be cash flow positive in the future. A general lack of financial knowledge and poor cash management is a partnership for disaster. A question that every owner should ask is, “When is the last time a 3-month or 6-month cash budget was prepared for my business?” The answer is not just knowing when the cash budget was prepared, but more importantly, knowing that the business will have enough cash to operate, make payroll, service debt, pay vendors, etc.
4. Insufficient Planning
Planning is important for any business regardless of size. Businesses must establish objectives that include all areas of a business such as operations, sales, marketing, and employees. Planning creates a proactive philosophy rather than a reactive philosophy in a business. Planning does not have to be elaborate or long-term, but planning is essential to knowing where the business is going and how it is going to get there.
5. Forgetting Who Pays the Bills
Frequently, small business and SME owners are so swamped with work that they never take the time to “step into the shoes” of their customers to see and experience their business from another vantage point. It is important for business owners to understand what customers like and dislike about the business, how the competition differs, or what customers desire most when dealing with a business. Since customers ultimately pay the bills for a business, businesses need to see and experience what their customers see and experience. Otherwise, the business lacks the knowledge of how to fine-tune its business to cater to the desires of its customers.
Success vs. Failure
No one ever said it would be easy owning and operating a small business or SME. With the knowledge of what creates business success and its counterpart what causes business failure, an owner can use this knowledge to create a long-term sustainable business and overcome the odds of failure.
