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SMALL BUSINESS FAILURE IS NOT FOR YOUSmall business failure or in fact any size business failure can be defined as the closure of a business that results in a financial loss for at least one of the creditors of the business. Many businesses close, for a variety of different reasons, without loss to anyone and these closures are often called a small business failure. Strictly speaking, such closure is a business dissolution and not a failure. Such confusion and the difficulty of obtaining accurate statistics on small business failure rates has lead to the belief that small businesses fail at an alarming rate. This is not true and at least 50% of all start-ups are still in business five years later. Of the other 50% many have closed due to illness, death, sale of the business or change of business. In fact the chances of success with a small business are generally very good and for those who prepare well for their business, excellent Plan to survive that first five years and your business will probably last a generation! The reasons for such small business failure are many and varied, but in all cases, some forethought and pre-planning will reduce the chances of your business failing. Over the span of my career in business, I have seen many small businesses come and go, many for obvious reasons, others not so. It is always a sad occasion when a small business that has managed to survive for two or three years, suddenly folds. Why do small businesses often make it for so long and then collapse? The chances of small business survival can be much improved by taking certain basic steps before going into business or, at the latest, soon after start-up. Prepare for success and success will find you. Let’s start with a look at the six major reasons for small business failure and suggest some actions to help prevent such failures. Firstly we must assume that any failure is not due to laziness and secondly that the business has been chosen for the right reasons and has potential. Here we are then:- 1. LACK OF PLANNING. Before actually starting in business, any business, the more preplanning that is completed the better the chance of building a successful long term business. All preplanning should revolve around a comprehensive Business Plan for your business. With a good plan in place, you will know where your business should be at any stage in time. It helps you see where you are going wrong or dropping behind, so allowing you to correct mistakes and get back on track. All your goals should be listed in your business plan and most of your major goals should have a plan ‘B’ suggestion in case of need. Simply put, in my experience, most small business failures can be traced to a lack of preplanning, by not following the plan or not adapting the plan in time to save the business. So spend time on your business plan and review it at least monthly. It is your road map that with good navigation can lead you to success. 2. QUALITY AND CUSTOMER SERVICE. If you don't intend to produce a quality product or give quality service, don’t go into business! That’s it, period! Quality might cost more, but is the only way to sustain and grow a business for the long term. Plan on quality from day one! Customers expect that attention be paid to their wants and needs, in a professional, polite and considerate manner. If you can’t provide such a service, you will be on notice for your very own small business failure. Your advertising and Web site also should reflect this quality 3. LACK OF MONEY.
We have all seen that new store that opened in our local shopping mall and then closed three months later! There can be numerous reasons for this, but lack of money is probably the major reason why small businesses fail. The money simply runs out before the business becomes self sustaining. In many cases the type of business will determine the amount of money needed, before one can expect sufficient income to keep the business afloat. The corner store can expect to be in profit quickly while the ship builder will take years before turning a profit! Be sure that you really appreciate and understand this. In some businesses you can expect to need funds for months or even years before the business makes sufficient profit to cover its costs. Be prepared and plan for this! In all cases when forecasting your start-up cash needs, remember that you will always need twice as much as you think you will need! This is a law of nature! Another common failing of new business people is to neglect to differentiate between cash in the bank and profit. Very basic but often overlooked, either out of ignorance or blindness. If you neglect to pay your suppliers before yourself, you are soon out of business, and another small business failure is recorded. Another death knell for business is the personal use of business funds. Unless it is part of your salary, it belongs to the business, don't forget it! With any business, money is needed for both the business and your personal needs. Build into your business plan salaries for yourself and any of your family that will be assisting with the start-up. I have seen business plans that contain no provision for the founders salary and when asked if he/she is not worth any reimbursement for all their hard work in putting together and starting the business, reply “Oh, but I will be getting all the profits”. What a way to go! Profits can be long in coming so forecast your costs to include enough for you to live on. At least that will show you what you need in money to survive the early months or years before break even and profit. So to re-cap here:-
If you have a business that has potential, in the right location, then provided you have planned your money requirements realistically, you will succeed. Any small business failure can usually be traced to money problems, so have your line of credit or overdraft facility in place with your bank long before you need it. 4. LOCATION. The location of any business can be critical to its survival or it can be meaningless. Just be sure that your business is in the right place. Where you locate your fast food outlet is critical, your home Internet business can be anywhere! The best location for any business will depend on the type of business you are planning or are in, as well as the type of customer you will be serving. The competition in the area will also affect your decision.
It would also try and locate so that it is convenient to its raw material supplier's, services, etc. One should also bear in mind your employees, their location to the business, transport and safety needs. If you have customers visiting your business on a regular basis, consider the locality of your business. Will they be happy coming to you, are you convenient to them? Ultimately always rent or buy in an area to best meet the needs of your customers. Many a small business failure has occurred because this has been forgotten.
Before deciding on a locality for your business, consider who are your customers, where do they come from and how wealthy are they? Once you have this information, you should then rent or buy in the best location to fit your customer profile. For example, if you are aiming for an up market jewelry store, then the best location, in the best part of town, in the best shopping complex, is a must. 'A' type business should locate at 'A' class sites. Remember, the better the site, the more customers you can expect, as well as the higher value of sales per customer Cost of rent therefore is of minor concern, especially if your low rent location leads to your small business failure.
Always aim for the best location you can find if you want to run, and be known to run, a first class business. From lawyer to cleaning service, the location tells the customer what to expect! So even if your business does not require offices in an up market area make sure the actual office is good for the area.
Don't lock yourself into a locality with no room for growth. If you are leasing, go for shorter leases with more renewal options than single long leases. Long leases can lock you into a site that is no longer suitable and so stifle your growth
The better the area or the accommodation, the higher the rent, also, the higher and better the customer throughput A few more customers soon cover higher rents. Think of ways to expand the business to meet the rent, not move to get cheaper rent. Rents only go up because the locality warrants the increase. Try and stay in business in such areas, they are good for business, your business.
5. RANGE The old saying “Don’t put all your eggs in one basket!” is as true in business as it is in ones private life. Many businesses, particularly small start-up ones, tend to have little or no range of services, products or customers.
It is easy to get locked into one customer; in fact you might have started your business solely to service that customer. A change of management at your sole customer’s business and you could have lost your customer! End of business! Small business failure can often be traced to the lack of a broad customer base. Many customers make for a safe business!
Product range is equally important. Any business that relies on a few products is always more at risk than one with a well diversified product range. For example, in my own case our manufacturing furniture business at start-up had 10 or so lines, within two years we had 300! A friend had a large service company that provided cleaning services to government hospitals, an all eggs in one basket situation. He saw the weakness and was soon cleaning airports, schools, conference centers and even private homes. Both his customer and product range had expanded. This diversity saved him from small business failure on more than one occasion.
Remember the 10% rule. No one product or customer to exceed 10% of your total business. If your business is not in that position go out and change it. There is safety in numbers!
It is generally not known that the high cost of theft from businesses can lead to small business failure. In the USA alone it is estimated that over $40 billion annually is stolen by company employees. Small businesses must be aware of and plan against such losses and you only have two choices - catch the thief after the theft or prevent the loss taking place. Investing in security costs, but is essential, so plan to:-
I am sure that there are many other reasons for any small business failure, but I would suggest that these cover the bulk of them. Get the basics right at start up, watch your environment as you grow and change with the flow as necessary. Your business will then grow with you long into the future. YOUR BUSINESS, RIGHT OR WRONG. At times we can all be very short sighted and not see the writing on the wall. Many businesses are started for the wrong reason or located in the wrong place. If you start a business that has no chance of success you only guarantee the small business failure that we all hope to avoid. What? Who does that? Unfortunately more people than you think; so be very careful before you select a business. Make sure it will be able to attract customers with products/services that customers want and where customers want them! If you do that you will succeed. If you can’t do that, your small business failure cannot be prevented, so be smart and don’t go into business without making sure that it is the right one for you. However if you remember that you, the business owner, are the maker of your own success, small business failure will not be an option for you. Return from Small Business Failure to Business Management Basics Home Page Subscribe to Business Buzz, the monthly newsletter that will keep you up-to-date on new, site business content, business news, tips and other items of interest. Be assured that your email address will be safe and that is why you will be asked to confirm your subscription by double opt-in. This will keep you safe from spammers and other malicious persons. Hope you enjoy Business Buzz. Subscribe here.
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