In today's blog I look at the issue of why so many entrepreneurs and small businesses fail.
Rich Schefren has been quiet recently but he's back with an interesting blog asking "What Is An Entrepreneur" which celebrates two years since he published the Internet Business Manifesto.
In this free report (details blow) he identified that the big problem for many businesses is they are run opportunistically rather than strategically heading towards a clear vision.
His blog included the following causes of business failure which I thought you'd want to know:
According to a research study published by John Murphy of Murphy Associates, cited by SCORE - the main reasons why businesses fail include:
- Lack of a solid business plan - 78%
- Being overly optimistic about sales and required funds - 73%
- Not recognizing or ignoring weaknesses and then not seeking help - 70%
- Poor cash flow management skills/understanding - 82%
- Have insufficient or irrelevant business experience - 63%
- Not pricing properly - 77%
- Not understanding or ignoring the competition - 55%
- Hiring the wrong people - 56%
- Not promoting the business properly - 64%
It is a sobering list so let's go through each in a little more detail
Small Businesses Fail Because They Don't Have A Solid Business Plan
Why does having a business plan help?
Because it forces you to think through the logic of your business - the what, the how, the when, the why, the where and the who and then commit it to writing so that you have a permanent record to go back to and review.
A business plan is a way to hold yourself accountable.
The big advantage of "being your own boss" is that you don't have to answer to anyone but yourself but it can be a fatal flaw if you don't do a performance appraisal on yourself.
Do you remember that small business guru Michael Gerber talks about the three parts of a small business owner - the entrepreneur (the business creator), the manager (the implementor) and the technician (the worker)?
So why don't you put on one of those hats and assess how the other roles have been performed?
Ask yourself whether as manager you have been supported by the entrepreneur creating a clear sense of direction and the guidance necessary to build a working business.
If you wear the entrepreneur's hat, has the manager been effectively implementing your ideas? Has the technician been effective and efficient? If not why not.
So why don't small business owners produce a solid business plan?
- It's seen as busy work - but thinking before taking purposeful action is the most valuable thing you can do. Brian Tracy says that every failure comes from not thinking enough before you take action.
- You only prepare a business plan when the business is starting out or you need a bank loan - just not true. The best businesses have a rolling business plan which is regularly reviewed and updated. It re-confirms the vision and goals and updates the action plan based on tests, results and any actions and reactions from customers and competitors.
- You don't have the time - sorry this is a poor excuse - the real answer is that you don't make time.
- You don't have the skills - my advise is that you shouldn't over-complicate it but if you need help, there are plenty of business planning guides and I even offer one for free - see better business plans
- You don't think it's important - but that's not what 78% of business owners in the survey now think. They have learned the hard way that business planning is an essential activity for businesses. I will keep saying this - it is so much better to try an idea out on paper and find that it loses money than to try it out in real life and lose a fortune. Business planning will not only stop reduce the risk of bad decisions, it will help you to implement your great ideas more effectively.
Small Businesses Fail Because They Are Too Optimistic About Sales and Required Funds
There is a delicate balance between having the confidence to back your business idea and give it a real go and being so optimistic that you are certain you have a sure-fire winner without seeing the pitfalls, difficulties and constraints.
The world is tough and customers do need a compelling reason to buy from you. Writing your business plan helps you to:
- Find your unique market position where you are better than competitors in ways that matter to customers.
- Decide how you will spread your marketing message
- Face up to possible constraints and skill shortages so that you take action to improve
- Focus on your underlying assumptions as you work your way down the sales funnel in terms of numbers and time lags.
Many of the business plans I see are too optimistic in their timing as business owners assume that prospective customers will leap into action at the first contact. It's just not true. Jay Conrad Levinson (Father of Guerrilla Marketing) says that it takes on average nine customer contacts to turn a name into a customer.
This optimism then causes cash to become a problem. Because sales forecasts are too optimistic, the underlying cash forecasts have cash receipts flowing into the bank account faster and to a higher value than is likely to happen. This false picture then shows that the business can afford to splash out early on expenses which it should defer until the business concept is proven.
Small Businesses Fail Because Owners Don't Recognise Weaknesses And Then Not Seeking Help
I mentioned Michael Gerber earlier and if you have read his great book "The E Myth Revisited" you will know that many small businesses are started when the entrepreneur has an entrepreneurial seizure and wakes up with the idea that he could start a new business.
There is no acknowledgement of the fact that the person has never been taught how to develop a business but just an inner confidence - "It must be easy because so many other people do it."
There seems to be a reluctance to admit any knowledge gaps and to seek help from business coaches and other business professionals.
I understand that it can seem expensive but being able to tap into extra knowledge and experience is invaluable.
There is even a reluctance to subscribe to programs such as Scott Hallman's Small Business Growth Club (affiliate link) which provides outstanding value on how to build a profitable business.
Small Businesses Fail Because Of Poor Cash Flow Management
Never forget - cash is king.
There is an old banker's mantra that is well worth remembering:
Sales turnover is vanity
Profit is sanity
Cash is reality
For more details about cash flow forecasting see the Importance of cash and cash flow forecasts.
Small Businesses Fail Because The Entrepreneurs Have Insufficient Business Experience
I mainly covered this item in the "not recognising weaknesses or asking for help" point above but lack of business experience means that many people start a business without knowing what is required to start a business.
In other words they don't know what they don't know so they can't ask for help.
Small Businesses Fail Because They Don't Price Properly
Pricing is where the rubber of your business strategy hits the road as your customers have a direct choice between your product and price combination and your competitors.
Price too low and you win orders but don't make any profit (remember the banking mantra).
Price too high and you don't make any sales.
To make it worse, every buyer loves to negotiate a lower price.
If your product is great value at £50, it is an even better buy at £35 so you can expect to come under continual price pressure as the buyer fishes for a discount. It is good buying practice but you need to be able to resist and have the confidence that you have communicated your benefits/value/price combination effectively in your selling.
For more information about pricing, see my free report How to price what you sell
Small Businesses Fail Because They Don't Understand Or Ignore The Competition
Even in business plans from big companies who should have known better, I have seen ambitious growth plans where the company is clearly hoping to grow at a faster rate than the market. The only way to do this is to take business away from competitors and you have to be prepared for them to react.
As a child what happened when you tried to take a toy away from your brother or sister when they were playing with it? I bet they put up a fight to keep it or at least shouted to Mum for help.
It's the same with competitors. If you take what they think is theirs through aggressive price competition, they will react and try to pinch at least one of your customers.
Sign up to the free report with my newsletter to find out more about how to win profitable business away from competitors.
Small Businesses Fail Because They Hire The Wrong People
Michael Gerber warns about the dangers of building a people dependent business when the entrepreneur should be building a business based on systems. While I agree with systemisation I still believe that the quality of people is an essential factor in building a great business.
The problem is that it is difficult to recruit. For all the interview techniques and personality tests, you don't really know what you have until you make your decision and see the person working in your environment.
Brian Tracy has an expression "hire slow but fire fast".
That makes much more sense than the easier "hire fast and fire slow" which saddles businesses with uncooperative, uncommitted and poorly skilled employees.
If you find that you have made a recruitment mistake then take action sooner rather than later. Brian Tracy teaches a technique called zero based thinking which involves asking yourself the question "Knowing what I know now, would I still hire this person?"
Small Businesses Fail Because They Don't Promote The Business Properly
I have been writing a recent set of articles that look at common marketing mistakes based on the ideas of master marketer Jay Abraham.
In these four articles I explain that many businesses don't do the market research, don't develop their own unique selling proposition and use the wrong type of advertising which doesn't give them results that can be measured and improved.
Reduce The Rate Of Business Failure
This blog is packed with ideas, tips and extra resources to help you to improve your business. Please the information in here and the blog will continue to grow and develop.
As well as my own ideas, I bring you the ideas of my favourite ten small business gurus together with other ideas as I come across them.
I started with a reminder of Rich Schefren's Internet Business Manifesto. Even if you don't have a business that trades or promotes itself in any way through Internet marketing, much of the report still makes very thought-provoking reading. You can download your free copy of the Internet Business Manifesto (affiliate link).
If Your Business Is Already In Trouble
If you have landed on this page because your business is already in trouble, please see my article Business coaching in tough times which looks at the options in terms of self help, business coaches and consultants and turnaround managers.