Why Do So Many Small Businesses Fail? An Expert Weighs InLearn the pitfalls that can sink your business, and key tools to avoid them.
For the first time in history, the number of small business exits exceeded the number of startups this year. That means that more businesses are closing than are being created. It’s troubling news for small business owners, people who are eager to be their own bosses and strike out on their own. If they’re more likely to fail than succeed, why even try?
This is a valid and natural concern for you if you’re one of the many aspiring entrepreneurs around the world. But it shouldn’t stop you from chasing your dreams.
Mike Pendrith, CEO of PerformancePoint Corp. in Toronto, Canada, works as an advisor to small and mid-sized businesses and has seen the highs, lows and everything in between in the journey to start a small business. He shared his findings in a blog post titled “12 reasons why new businesses fail.” Here’s a snippet of his advice, and we urge you to dig deeper at evancarmichael.com to learn more.
Lack of a business plan
“Too many business owners start their business without a plan,” Pendrith says. “They simply ‘open their doors’ for business and then expect to succeed.”
A good business plan generally includes what you hope to accomplish with your business (your goals) and the specific strategies you will use to get there. Many entrepreneurs skip this step, and Pendrith says that’s a big mistake. If you don’t have a business plan, every step thereafter is meaningless. Nonprofits like SCORE offer free help with business plan development as well as mentoring, marketing tools and a comprehensive Q&A.
Not enough money
How much money will you need for your startup? The answer, essentially, is to go back to No. 1: Pendrith says if you don’t have a business plan, you can’t know how much money you’ll need to sustain the business, and you’ll run out of money due to poor planning. The key, he says, is to determine startup costs for the first few months of operation, or until cash flow is positive (aka in the black).
You don’t understand your customers
Say you want to open a donut shop in a neighborhood that’s generally regarded as health-conscious. Have you really thought about the people you’ll be serving, or are you just hoping it’ll work out? Pendrith says understanding your industry is key to avoiding failure, simply because without that knowledge, you won’t know if it’s growing, declining or flat; you won’t know what changes in technology will affect your business; and you won’t know if the sun is setting, so to speak, on the product you’re selling.
Your business doesn’t distinguish itself
Does your business stand out, or are you just another “me too” business that makes it easy for customers to go elsewhere?
“Every business owner must objectively ask this question: ‘If I were a customer, why would I want to do business with this (my) company?’” Pendrith says. “If you cannot identify two good reasons, then rethink your positioning and your strategies.”
You lack management and people skills
Before you started your own business, which businesses did you patronize the most? Chances are, Pendrith says, they were the businesses with the people you enjoyed working with, people who seemed to enjoy their jobs and genuinely care about their customers. If you do not treat your employees fairly, they are likely to leave, leading to a high employee turnover. That will inevitably bleed into everyday operations and weaken relationships with customers. “Treat your employees well,” he says, “and they will enthusiastically help to grow your business.”