#29: Why Small Businesses Fail – Part 1

Today we are going to move on from the financial aspects of running a business and how to structure a start-up correctly. Now is the time to really focus and concentrate instead on the main reasons why small business fail.

If I put my black hat on and talk about the main reasons that small businesses fail, it’s not because I want to depress you just at the point of launching, it’s mainly to tell you where the traps are so that you can avoid them.

Small businesses fail because they run out of cash; and we already know that probably the biggest reason that this happens is because they did not fully understand what they were getting into. But there are other reasons that can come into play:

• Lack of self-awareness – they have been unrealistic about their strengths and weaknesses, i.e. they thought they were good at sales when they were not. I can think of somebody down in Sussex who thought they were the best thing since sliced bread in terms of sales, but they were selling at the wrong price which meant the more business they did, the more money they lost.

• Research – they came up with a product or a service which was a solution looking for a problem; their research was insufficient for them to clarify that there was a market for what they wanted to do.

• Underestimating costs – you should be able to figure out your costs; for example, don’t guess what your insurance costs will be – find out. If you use as many real numbers as possible, you can then figure out what your breakeven point is, and then you know how much money you have to make to cover your costs before you start making money.

• Allowing customers too long to pay – if you talk to any owner of a small business and ask them what their biggest gripe is, number one is almost always bad debts. If your model is business to consumer, and you are dealing with the public, it is slightly different; by and large you will be paid by cash, cheque or credit card so you are safeguarded to a certain extent, and also the timeline is shorter.

Any of these scenarios will have dire consequences to the success of your business, so make sure you are fully prepared to tackle them should they arise.

Next month we will look at some more reasons why businesses fail, but if you think you need some more guidance on this please don’t hesitate to contact me.