Why Small Businesses Fail: 3 things you need to know
Plan for success photo by WorldIslandInfo at FuturistMovies
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). These are always controversial studies – how do they define Small Business? How do they define failure? Wouldn’t there be a big difference (higher?) failure rate in the last 2 or 3 years? All great points, but in general we can agree that there are a lot of businesses that don’t make it.
On the other hand, 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 (caution the site loads with music on). If you haven’t been, Curious Sofa is a great store with lots of interesting stuff to look at.
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 long way down.
Part of why this story caught my eye was because I had a very similar conversation with a business owner last week. They had been in business just over two years and had started out of the gates with a lot of money in their personal bank account. Their operation grew quickly, had a lot of happy customers and is generating decent monthly revenue. The kicker is that the owner has yet to take a salary and is now out of money in the savings account – they have lost money every month for 2 years!
What are the missing ingredients?
Every business is different (which is why my job is fun), but I think you can summarize the biggest missing ingredients into 3 areas – People, Systems and Planning.
One key area that small business owners often overlook is the importance of the people around them – employees, vendors they buy from, advisors, 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 easily handling a bad hire – best case it’s an expensive mistake (to the tune of $30,000 or more depending on the position – see this calculator from ADP). 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. There are a lot of ways to a address this – whether it’s meeting with a group or with an advisor, I have some suggestions that might be worth considering.
Action Point – What are 3 things you could start doing to improve the people that you’re hanging out with or working with?
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 systemizing 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 isn’t documented? How could you get started implementing some system improvements?
I probably have these in the wrong order because Planning needs to come first. The single biggest issue with 2 examples above is that neither business had a clear plan on how they make money. One of my coaching colleagues in the PBCA is Adam from Cleveland and he recently wrote a great article on the Profit Planning approach they do with their clients.
The Profit Plan is 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.
I’ve been working with my clients on this approach for quite a while as well, but I really like the terminology of the Profit Plan (thanks Adam). The key point is that 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 – contact me if you’d like help on that.
What are other key ingredients to business success? Do these match up with your experience – share your comments below and start a conversation!
Shawn Kinkade Kansas City Business Coach