Why Do Small Businesses Fail? – Small Business Failure Statistics
The sad truth is that most small businesses will fail.
Percentage of small businesses that fail within first five years:
In most countries (including the US and UK), more than half of newly created enterprises fail within the first five years (business failure statistics according to OECD Entrepreneurship at a Glance Report 2016 and Eurostat).
One, three and five-year small business survival rates in EU (2014) © Eurostat
Small business failure rate is high. But what is the primary reason of it? Why do small businesses fail?
Believe it or not, but small businesses around the world are failing for the same set of reasons, even as you read this article.
We think you’ll agree: that sounds pretty frightening for every (soon-to-be) entrepreneur.
Or does it?
Well, as it turns out, knowing the top small business failure reasons in advance, or at least sufficiently early, can be life-changing.
This in fact can save your new business from failure.
And this is exactly the rationale behind this comprehensive article.
Here, we outline 10 major small business failure reasons, and provide 50 actionable solutions against potential failure.
And the best part?
Most of them are ready to implement, starting now!
So, why do so many small businesses fail? How to save a failing small business?
Let’s dive straight in.
- Low Sales
- Lack of Experience
- Insufficient Capital
- Poor Location
- Poor Inventory Management
- Over-Investment in Fixed Assets
- Poor Credit Arrangement Management
- Personal Use of Business Funds
- Unexpected Growth
1. Low Sales
This is a catch-all for many small business failures. This keeps new business success rate low.
So what’s the problem?
Pretty straightforward: low sales is probably the shortest way to business failure.
Obviously, there are some reasons behind low sales volume.
Sometimes this can be a poor marketing strategy, not enough spent on advertising, a complicated process for customers to purchase the product, low production rate, and so on.
One of the classic reasons for low sales is not enough funds being allocated to marketing. Too many businesses fail to put sufficient funds to adequately promote their products or services.
Needless to say, to avoid issues of low sales all aspects of marketing and manufacturing will have to be considered.
Solution 1.1: Proper planning = Higher chances.
Let’s be honest, most of the successful businesses are built on meticulous planning. Very seldom spontaneous projects turn to profitable businesses.
You’ve probably heard the advice a million times, but proper planning is indeed critical.
This perfectly applies to your sales.
Before acquiring the loan to start your business, it is important to predict the necessary amount of sales needed to sustain the company once the loan becomes due.
A similar planning is also required when you start a business with your own money.
When the projection is made, it is important to tailor everything else to match it (your expected burn rate, marketing, finances, etc.).
Although it is impossible to predict the exact sales volume, it is still wise to be prepared for the worst scenario.
Solution 1.2: Reinforce your sales & marketing techniques.
Here’s the point:
Attracting enough sales depends on how you are marketing the product or service.
Successful businesses constantly seek to run their marketing at full speed and convert as many leads as possible, often at an increasing pace.
Business milieu rarely forgives any slack. You probably won’t survive if you fall behind.
Yes, it maybe a little sad.
But it’s true.
So do not lag behind!
Rethink your sales & marketing. Clear them up of all garbage.
Unnecessary stuff slows you down while you barely notice this.
Try to identify the weakest parts of your marketing & sales process, which are holding you back and providing none or very limited results.
Once you know what they are, immediately get rid of them.
You may later substitute those parts with entirely new practices, methods, tactics, and strategies.
The whole idea here is to:
1. clear things up;
2. keep testing with existing and new material;
3. leave only those things that bring tangiable results;
4. Repeat 2 and 3.
Pro tip: Never stop testing. Try to beat your best methods, tactics, and strategies with the new even more effective ones.
Solution 1.3: Get maximum sales on each customer (probability of sale as high as 70%!).
Here’s the thing.
You probably already know that a new customer costs significantly more than existing customers.
At the same time, according to Marketing Metrics there is only a 5-20% probability of selling to a new prospect, while chances of selling to an existing customer are between 60-70%.
Your existing customers are at least 3 time more likely to buy from you.
All you have to do is to take this chance.
We recommend starting with upselling and cross-selling to see if they work for you.
To get off the ground, you can check how other businesses are already using upsell/cross-sell to increase their revenue.
Not grabbing the chance to sell more to your existing customers is missing an opportunity.
And opportunities shouldn’t be missed.
Remember: lost opportunity harms your business and contributes to failure.
So, it’s important to tap into every opportunity that your existing customer base provides you.
If you already have a client database in place, why not use it to increase sales?
Here are some tips to help you leverage customer data.
Solution 1.4: Effective Pricing.
Those are questions that haunt many entrepreneurs.
The influence of pricing strategy on sales volume is tremendous.
Before we go any further, just check this out:
You bet it is!
Pricing is art. Pricing is science.
Right pricing is hard.
But one thing’s for sure:
Pricing always deserves a focused approach.
The right pricing strategy can enhance sales volumes, laying the foundation for a business that will prosper.
Get it wrong, and you may end up with problems that will drag down everything you’ve built.
So, it’s probably a good idea to review your pricing strategy.
Try out different pricing methods and techniques that are available to you.
Stick to what brings you more profit.
Read these articles on pricing and pricing psychology for further guidance:
- Pricing Psychology: 10 Timeless Strategies to Increase Sales by HelpScout
- How to get your pricing strategy right and increase business profitability by ICAEW
- Use Pricing Strategy to Boost Sales by Harvard Business Review
Solution 1.5: Do not squeeze your marketing budget, unnecessarily.
Marketing is something everyone wants, but no one wants to pay for.
The key is to approach this issue in a slightly smarter way. Understand this, slashing your marketing budget without good reason means cutting off opportunities.
Which is not to say that rationalizing a budget isn’t a good idea. But it’s not the marketing budget that should be cut, it is individual toxic marketing elements that must be out of it.
Those are two entirely different concepts.
Solution 1.6: Collect customer feedback and use it to increase sales.
This cannot be over-emphasized, since customer feedback is globally accepted as critical for business.
Customer feedback can help you in many ways by providing actionable insights to create a better customer experience. Tangible data from customers can be used to make better business decisions.
If utilized effectively, customer feedback will help increase sales.
Consider this, for a second:
- Dissatisfied customers 4% 4%
- Customers who do not voice complaints 96% 96%
- Customers who will never come back 91% 91%
Customer feedback is essential.
The constant dialogue with people for whom you have designed all you efforts looks just natural.
If you do not know where to start, try the five easy ways of collecting customer feedback from Salesforce and see how you can increase your sales with the newly acquired data.
Solution 1.7: Overdeliver.
Overdelivering is a part of the more general concept of exceeding customer expectations.
This is a powerful way of stable sales growth and is backed by human psychology (“happiness = reality – expectations” principle).
An incredible experiment has been done on this by Elliot Aronson (University of Minnesota) and is available here if you want to explore this phenomenon further.
One thing is pretty clear: people (a.k.a. customers) like it when you exceed their expectations.
This works, and many businesses have successfully proved it. So, when your sales are floundering, try overdelivering.
Here is an excellent guide by Shopify on this topic. Start implementing it right away.
2. Lack of Experience
You know why do small businesses fail?
Because they lack the necessary business and industry experience.
Yes, this is a generalization of sorts, but not having the experience of managing the grind of a small business is indeed one of the primary reasons for failure.
This is another major reason why small business success rate is so low.
Those who have the relevant experience usually understand the daily challenges that a small business faces. More importantly, they are more likely to spot potential trouble in time to make course corrections.
Of the small businesses that succeed, many are run by people with previous business experience (including failed business attempts), whether it was their own venture or assisting someone else with a startup.
What it means is this:
The more business experience you have, especially with running the daily operations, the more likely you are to succeed.
Which is not to say that you can’t hit the bullseye with your first try.
Well, that’s fair enough, but…
What specific options are available, for you to start and run a business with no prior experience?
Let’s take a closer look.
Solution 2.1: The easy way – start a business in a field that you already know.
This is a no-brainer.
The good business idea is not always something red-hot. So, do not torture yourself trying to come up with a revolutionary business idea.
There are always some business opportunities out there in almost every field (including yours). Most of them are pretty straightforward and time-tested.
You might just pick the one that looks most promising and closely related to your unique experience.
The next step would usually be validating the idea, and once that is done you are ready to initiate the process of setting up your business.
Starting your new business in a field that you are already well versed in will provide you with a nice starting boost and probably a valuable competitive advantage.
If you want to make your life easier and the probability of failure lower, then it is an excellent idea to start a business that suits your expertise.
In case you can’t find a business idea that appropriately matches your experience you can try asking yourself the following simple questions to find one:
- What is my biggest knowledge that makes me different from others?
- What skills I have developed that no one or very few people can have?
- What other experience I have that no one else have?
- Can I use those experiences to build something special for other people?
This may seem elementary at first glance, but it is a powerful technique to understand your unique experiences and discover specific business opportunities that are open to you.
Pro tip: Used in conjunction with our Business Idea Ranking Table, this strategy can bring you fantastic results.
(For full guidance on how to use the Business Idea Ranking Table read our Ultimate Guide on How To Start a Business)
Solution 2.2: Learn as much as possible.
If you have already started a business or decided to go with a business idea in an industry that you have no previous experience of, then the best solution might be to study things and learn as you go.
Educate yourself as much as possible. Education has a positive correlation with business success rates.
Research all ins and outs of your particular business field and the industry it’s part of.
Apart from industry-specific insight, you also need general business knowledge to compensate for the lack of experience.
As a quick yet effective solution, we recommend reading the Personal MBA by Josh Kaufman.
Solution 2.3: Find a mentor.
You might do as well.
SCORE is a non-profit organization dedicated to helping small businesses through education and mentorship.
3. Insufficient Capital
How many entrepreneurs fail due to lack of sufficient capital?
Believe it or not, but…
Perhaps the most common mistake that people make when starting up their small business is not having enough money on hand.
All too often, the money used to start the business does not last long enough for the company to make any profit.
This is particularly true when a large loan is used to get the business started.
With no/poor business planning/management it’s easy to run out of cash before the business starts bringing in enough revenue to keep it alive.
When a business runs out of cash, it rarely survives.
Solution 3.1: Get at least 25% plus capital before you start.
Every small business/startup ought to have sufficient capital to get the business through the first six months, and often longer, depending on the overheads that need to be paid.
So, calculate how much you will need to pay over six months (or a year) and add extra 25% for unexpected expenses.
More is better here. Cash is the lifeblood of business.
The larger the capital you have available, the more time your business will have to prove itself and start generating revenue.
Solution 3.2: Understand your finances.
Seriously, do it now.
If you have already started your business, the sooner you understand your finances the better your off business will be.
Along with sufficient start-up capital, it’s pretty important to know what you are doing.
Depending upon your approach, your capital may drain away quickly or last longer.
Master this part, starting today.
Reading the Personal MBA by Josh Kaufman, the business book we have mentioned above should be a good way to start. The book has a chapter dedicated to Finance, which outlines the finance fundamentals quite comprehensively. You can just start right away with that.
Understanding the basics of finance before you actually start a business is essential.
It’s often not too late to catch up when you already have an operating business and it has not failed yet.
Solution 3.3: Watch your burn rate.
To get the most out of your available capital, it’s important to watch your burn rate.
Reliable and right accounting helps to effectively manage your finances and directly influences your use of funds.
The key is to reach a balanced rate of spending, according to a research paper titled “Startup Survival and a Balanced Burn Rate”, co-authored by Wharton marketing professor Ron Berman and Pablo Hernandez.
To dig even deeper and get your burn rate balanced we recommend reading this.
Solution 3.4: Establish reliable accounting (bookkeeping) system.
Reliable and right accounting helps to effectively manage your finances and directly influences the usage of your funds.
No doubt about it.
Handling the accounting (bookkeeping) on your own (even for the first few months) might look like a great cost-saving idea, but it rarely is.
We believe that accounting (bookkeeping) can properly be managed only by professional accountants/bookkeepers.
Depending on your circumstances, you might hire an in-house accountant or outsource this. The point is, the accounting part of business needs to be consciously delegated.
With professionally managed accounting (bookkeeping), in the long run you’ll save time and money, and prevent ulcers.
Even more, you’ll make sure that finances flow in and out in a structured and transparent manner.
This is absolutely vital to help you make the right decisions.
For even more flawless accounting you can use accounting software.
Below are some, check them out:
Solution 3.5: Avoid bad and unfamiliar financial mechanisms.
Financial mechanisms look attractive. They lure business owners and seem to be a good option to solve any capital related troubles.
However, not all of them are innocuous.
Any money that has been provided in the form of a loan inevitably turns to debt.
The debt coupled with disadvantageous conditions may easily lead to disaster.
Bad and/or poorly arranged financial mechanisms must be avoided by all means.
The best solution is to refrain from the use of any financial mechanism unless you are 100% sure of what you are letting yourself in for.
4. Poor Location
A common reason that companies fail is poor business location.
Let’s face it.
Although this is not about all types of business, location is often something that makes or breaks your business.
It’s all about the location, especially when your business caters to local customers (shops, restaurants, coffee shops etc.).
You may have noticed that the good locations cost considerably more than out-of-the-way areas in your community.
This requires careful research on your part when it comes to choosing the right place for your business.
Prime real estate is expensive as it’s a key driver of foot traffic and sales.
If you have already chosen a not-so-good location or simply can’t afford a good one, then try to compensate for this weakness by adopting appropriate actions.
Solution 4.1: Choose the right location from the outset.
When choosing the location for your new business pay attention to the following factors:
- Rental Cost
- Foot Traffic
- Crime Rate in Neighborhood
- Target Consumer
You need to be where your best customers can find you.
This means having an easily accessible location even during rush hour.
Plus, an area that generates a good amount of foot traffic and is considered safe by the public.
Falling in love with a particular place is easy. But do not get fooled by your emotions.
Ignoring the real world may lead to subsequent financial loss.
To avoid this scenario, we suggest using the simple ranking table.
People often overlook the power of ranking tables, whereas they are highly reliable bias filters. 🙂
Below is the very basic ranking table that you can use for the purpose of finding the best available location for your business:
While using the table, it is mandatory to base your numbers on hard facts only.
Ignore your unfounded inner voice/opinion.
The solid facts and numbers are real.
Anything else that has no reasonable grounds is often just plain illusion.
Illusions do not interact with the real world.
Pro tip: To achieve the best results you can slightly modify the ranking table by including additional industry-specific criteria and/or sub-criteria.
Solution 4.2: Go online.
In a modern world online by default means great location. Having an awesome website/online presence in addition to your physical location is a beautiful thing.
With each coming year, online matters more than anything that mattered before.
If your business suffers from poor location, going online can save you from probable failure.
Try to compensate (or complement) the drawbacks of your location with available online opportunities.
Want to know the best part?
Although there are currently well over 1 billion websites worldwide, small businesses still do not seem to take full advantage of this. According to a survey by Clutch, nearly half of small businesses in the US do not have a website!
Another research by Godaddy & Redshift Research shows that in Australia, Brazil, Canada, India, Turkey, United Kingdom, and United States 59% of small businesses don’t have a website. We assume that this number is somewhat equal or even higher in other countries.
Obviously, small businesses around the world aren’t fully utilizing the internet.
Survey question: Does your company have a website?
- Yes, since 2014 or earlier 41% 41%
- Yes, since 2015 13% 13%
- No, but plan to in 2016 17% 17%
- No, but likely in 2017 or later 7% 7%
- No, unlikely in future 12% 12%
- No, neither likely nor unlikely in future 10% 10%
Data source: Clutch
Some of the respondents are your competitors.
Needless to say, even a basic website means a quick win over at least part of your competition.
The best thing you can do today is to create a website (if you still do not have one). The rest will follow.
Just make sure that you constantly keep working on your website/online presence and that you devote the time, effort and budget for this to start bringing results.
Solution 4.3: Maximize your signage.
According to International Sign Association – Your sign is your voice on the street.
The powerful marketing tool working for you 24 hours a day, 7 days a week, 365 days a year.
Did you know that…
First-time customers coming in because of:
Word of mouth
Newspaper, Yellow Pages & Radio
The number of exposures that a good signage can bring is insane.
What we also like about the signage is the durability. A one-time investment made in a proper signage that requires no further effort from your side can deliver years of non-stop marketing.
Do not underestimate the power of signage. Get the most out of it.
Create your signage based on the following:
- Compelling color
- Contrast for readability
For further guidance on signage and its economic value, see ISA and a handbook on how on-premise signs help small businesses tap into a hidden profit center by New York Small Business Development Center.
Solution 4.4: Understand if your location is indeed bad.
Sometimes, when your business is not performing well enough, you might see the location as the number one reason.
However, this might be a hasty conclusion.
Before making this kind of verdict, reanalyze your business performance.
First, try to push harder with your marketing channels and other available options to improve the business results.
Try to clear things up and see if your location is actually what is holding you back.
Nine times out of ten you will realize that there are untapped opportunities that you did not use previously.
It’s helpful to get customer feedback while running your marketing at full speed. Survey your existing clients to get to know what they think about your location.
In case it becomes apparent that your business location is doubtlessly wrong and there is nothing you can do about it – move to the Solution 4.5.
Solution 4.5: Change your location.
Sometimes, the business location is chosen so badly that spending extra energy on it makes no sense. So, if none of the methods listed above improve your business results – change your location.
Do not throw good money after bad, and do avoid a widespread escalation of commitment pattern.
5. Poor Inventory Management
Let us be brutally frank:
Too many businesses either overstock on products that do not sell or do not have the products that are selling.
The good news is, thanks to new methods of inventory management, you can significantly improve your systems and keep track of what you sell virtually in real time.
So let’s get down to it.
Solution 5.1: Set up your inventory tracking system at the outsetfrom the start, and check it daily to see what is moving and what isn’t.
By taking a few minutes out of your day to keep track of the inventory, you can increase your sales and stop wasting money on stocking items that sit on the shelves.
The successful businesses take inventory management seriously.
A properly set up and regularly monitored inventory management system positively influences the business.
Being systematic is important to ensure that the process is uninterrupted and under constant control.
Solution 5.2: Test and improve.
Even if you have some inventory management system in place, it’s still a requirement to maximize its efficiency by researching and testing new methods continually.
Some approaches may seem good at first glance, but they won’t necessarily work for you.
So, you basically need to try things out to see how they work for your business.
Find something that seems a likely fit, stick to it and keep improving it on a constant basis.
Once it has proved to be successful, try to automate the whole inventory management process.
To start, you can check these 3 popular inventory management techniques explained by Fishbowl:
…and this infographic from Tradegecko:
Solution 5.3: Automate.
Once the successful systems have been created, try to automate them as much as possible.
This will provide you with many added benefits including speed, real-time analytics, low costs and fewer manual errors.
Automation can be successfully achieved with inventory management software, so let’s move to the next solution.
Solution 5.4: Use inventory management software.
Consider using inventory management software for automation, higher performance and faster growth.
If chosen carefully and correctly, good inventory management software can help you in many different ways including saving time, selling more and providing better control over the whole process.
There are many online inventory management solutions out there. Choosing the right one is again a matter of testing.
To start, you can check these online solutions to see if they work for you:
Solution 5.5: Hire inventory control personnel.
If your business is too dependent on inventory management, then it can be a good idea to experiment with hiring specialized inventory control personnel.
This might look like an unnecessary cost at first glance, but investing in your inventory management team may prove itself in the long run.
Solution 5.6: Make inventory checks more frequent.
When you experience difficulties with inventory management, then it makes sense to make inventory checks more frequent.
This will help you to anticipate and detect problems faster and cure them accordingly.
6. Over-Investment in Fixed Assets
By investing too much in fixed assets, you lack the flexibility to make the necessary changes as your company grows.
Fixed assets need to be rigorously researched in terms of what is necessary to invest in and not spend anything more so that you do not overcommit.
There are many aspects of running a business that require having the funds available to make necessary changes. Putting too much into fixed assets compromises your control over your finances and exposes you to greater risk.
Solution 6.1: Understand your objectives.
Investment in fixed assets should be laser focused on your business goals.
Unnecessary purchases are not something that a truly promising business should tolerate.
Invest in a fixed asset only after you fully understand your objectives.
Make sure you have this matter covered in your business plan (this involves an in-depth research on the topic before you make the actual investment).
Solution 6.2: Get (expert) advice.
Refer this question to your business mentor if you have one, or alternatively try to speak to someone with practical industry experience.
In the real business world, lots of things cannot reasonably be foreseen or predicted before you actually dive in.
That is where people with relevant experience can help. They can provide you with helpful insights on industry-specific fixed assets.
It’s very easy and typical for a small business to fail for this reason. Thus, the external point of view on fixed assets is often critical for building a successful business. If done right this will save you from failure or at least mitigate the business failure risks.
Generally, the value of unbiased business advice is often discounted by business owners.
It’s a fact that you never know what kind of information you’ll get from others until you go and ask them.
Just take this as some sort of competitive advantage.
Go and ask what people know and think. Then simply use the information you get for the benefit of your business.
Pro tip: Filter any information you get from people, including your highly-trusted sources. Always distil the information through your innate common sense, intelligence, knowledge, and personal experience.
The business and industry knowledge that you’ve possibly managed to acquire already comes to your help here.
If have no proper or prior knowledge, then refer to the solutions provided in the first section of this article (Lack of Experience).
Pro tip 2: Do not limit your sources only to people you know in real life. Leverage the power of online communities. Ask questions on Reddit and Quora and get to know what a broader audience thinks.
Remember to be highly specific to get the useful feedback.
Include as many details as possible in your questions. Broad messages are likely to bring similarly vague and general comments that are usually not helpful.
Solution 6.3: Invest in innovative and latter-day assets.
Fixed assets can be different.
Time flies, and often the best thing that was out there a month ago, can be already outdated today.
So, try to come up with the most up-to-date, long-lasting, efficient and flexible fixed assets. Along with cost also look for durability, quality, liquidity and other relevant factors. Invest some extra resources now (such as more research and time) to realize long-term benefits.
Consider different alternatives and try to pick the best.
Every right decision you take today keeps saving you pennies in the long run.
The small things tend to accumulate over time.
So, this usually translates into higher winnings with the passage of time.
Solution 6.4: Invest in liquid fixed assets.
You must admit the probability of things going wrong.
At some point, you might want to sell your fixed assets for any reason.
So, it makes sense to invest in the most liquid assets that are available on the market at the time of purchase.
This will make your life a lot easier if something goes wrong, and it can help to redeem your business from potential failure.
Solution 6.5: Stick to your business plan
A clear-cut business plan shall cover the fixed assets part.
If you don’t have a business plan, then read our article on How to Start a Business to write a good one.
Once you have a reliable business plan make sure you actually stick to it.
This will help you to stay within the reasonably defined investment limits.
7. Poor Credit Arrangement Management
This can manifest itself in different ways from not qualifying for additional loans, mismanaging funds, or failing to see the higher interest rate associated with poor credit.
For those who are starting up a small business and taking out loans, the interest rate will often be based on credit rating.
A single percentage point adds up to hundreds, if not thousands of dollars in extra expenses that do not go towards helping your business get off the ground.
The credit rating is the backbone of your loan acquisition efforts. It needs to be as strong as possible so that you can get the best interest rates. It helps if you can raise money from other sources to keep your borrowing down to a minimum.
In any event, the arrangement management you apply to your credit will play a significant role in the success of your small business efforts.
Solution 7.1: Do not handle credit arrangement on your own.
If you are not a financial professional then handling your credit arrangements on your own is not the best idea.
Credit mechanisms can be different and they are often hard to understand or manage.
Therefore, it’s highly recommended to seek advice from an external financial advisor or your mentor before taking any loans.
Solution 7.2: Try to avoid credit where possible.
Although credit gives you a nice boost, you still have to repay the money.
If you are not sure that you will effectively use the instant access to an increased purchasing power that credit entails, simply do not take it.
Don’t arrange any credit that you do not really need.
Even too much funding can harm your business.
Nine times out of ten you need less money to start your business than you might think.
Don’t make the mistake of borrowing money to fuel your business for the next five or ten years – usually you only really need enough money to make progress this year (plus 25% for unexpected expenses).
In other words, avoid credit where possible!
Building a business without getting involved in any sort of credit may take more time and effort, but running a self-sufficient business that does not need to pay anything out is a beautiful thing.
Solution 7.3: Consider other available financial mechanisms/tools.
Although the small business loan is probably the safest way of funding your business, there are still a few other financial mechanisms that might work even better.
In case you reasonably need extra capital don’t immediately go for a standard loan. Instead, research the other available funding options and go with something that matches your situation the best.
8. Personal Use of Business Funds
Too many business owners are tempted to take money out of their business accounts and spend them for their own use.
Given that the failure rate for small businesses is tied directly to how they spend their money, any of it that goes for personal use is taking away from the bottom line.
Tight management of the funds is crucial, especially in the first year of business. Therefore, there should not be any funds diverted for personal use during this critical time. Once the profits start rolling in and the loans have been paid, then you can reasonably reap the rewards of your efforts.
Solution 8.1: Make a clear distinction between you and your business.
Your business and you are separate (often physical and legal) entities. So, the funds your business owns is not the money you own unless those funds are duly transferred to you (as to a legitimate business owner).
Although it’s slightly hard to make this distinction when you operate as a sole trader, it is still very important to understand this.
Your business is not you; it just operates for you.
If you mix things up, then chances are that you’ll hinder your business instead of helping it.
So, make a rule to take any money out of your business only when it is financially and strategically justified.
Pro tip: On the contrary, throwing too much money into your business for no reason can be another potential mistake. Do not subsidize your business for no solid reason. Avoid investing extra cash to diminish its deficiencies.
Your business must stand on its own feets and become self-sustaining.
Accurate business data is critical in making the necessary improvements.
Too much help may cause subsequent failure.
Solution 8.2: Keep separate accounts.
Keeping your personal and business accounts separate will help you to not mix things up.
Below is the video by Nina Kaufman explaining why mixing your money is not a good idea:
Solution 8.3: Follow your procedures.
If you have specific procedures or rules for taking money out of your business – follow them.
Even if there are no penalties for the violation.
In case you do not have any procedures, but feel like it might help you – create them.
No need to make something fancy here. Even the most basic and straightforward procedures/rules may work.
In the end, it’s not the procedure itself but the compliance that matters.
Solution 8.4: Make sure all transaction between you and your business are at arms-length.
As you have separated your own personality from your business, now all transactions between you as an individual and your business as a business entity must take effect at an arm’s length.
This is important to ensure that the big picture of your business is not irrationally distorted.
Solution 8.5: Pay yourself a reasonable salary.
Pay yourself a reasonable salary that suits your business position.
Take money out of your business in the form of dividends instead of a salary or vice versa depending on your tax and financial situation.
Make sure that in all cases your salary is rational.
9. Unexpected Growth
This is not as uncommon as you might believe.
About two-thirds of the companies that made the Inc. Magazine “5,000 fastest-growing companies” list had shrunk in size, gone out of business, or been disadvantageously sold during the next five to eight years.
Failure rate for the fastest-growing companies in the US
Unexpected growth can destroy your business.
Do not repeat the mistakes made by Starbucks, Krispy Kreme, Pets.com, Crumbs Bake Shop, Wise Acre Frozen Treats and others.
While many small business owners would love to have the problem of too many people purchasing their products, it can create the unusual situation of not earning enough money to expand the business to cover the additional demand.
This is particularly true for manufacturing firms that must purchase new equipment and add new space to keep up with the sales.
This is more of a business model issue, in the sense that most planning revolves around projections for a steady growth in sales.
If the demand should spike unexpectedly, it puts the business in the unusual situation of not having enough capital to expand and meet the demand.
Solution 9.1: Define if the unexpected growth is temporary or long term.
It is best to simply work with what you have as long as possible to see if the spike is temporary or long term before making any decision.
If this is a temporary phase, then the necessary adaptation should also carry an interim character.
You have to be able to return quickly to your previous state without negative consequences.
Solution 9.2: Get prepared by educating yourself and educating/empowering employees.
If it’s clear that the growth is dependable, then you might consider investing more resources to adjust to it on a long-term basis.
Probably the best thing you can do is to educate yourself and your employees about the upcoming changes. This will save you from adverse effects that the adjustment can bring to your business.
Jumping into rapid growth without being well prepared, or even worse without really knowing what exactly you are doing can be fatal.
Solution 9.3: Go ahead with a growth strategy only.
It is highly important to have a clear plan before you enter into a phase of rapid growth. Combine the education part discussed above with creating a detailed strategy, and you’ll be safe in most cases.
Solution 9.4: Control costs and debt.
The riskiest part of unexpected rapid growth is the finances.
You do not want to fail when it comes to costs and debts.
Any financial mistake you make directly affects your cash (and the impact is even greater with higher growth rates).
As you already know, cash is the lifeblood of business.
If finances are poorly managed during the rapid growth phase, the chances are that the business will fail very quickly.
Solution 9.5: Beware that fast-growing businesses need to be managed much more carefully.
Keep in mind that fast-growing business should be managed in a more intense way. Be ready for this.
In case you are not sure that you can make it, simply don’t go for it.
Instead, focus on a slower but stable and safe growth strategy.
It can be quite difficult for small businesses that are just starting up to survive against established competition.
The most common failures happen when not enough research is done in the field to see if there is any room for a new business in that industry.
While it is true that several businesses in an industry is indicative of consumer demand, it is also often the case that the established businesses are already handling most, if not all of what customers want.
Solution 10.1: Defining the potential to sell.
Research is crucial to see if the demand is sufficient for a new business to enter the market.
After all, the key to running a successful business is not the effort to sell a product, but finding a product that sells.
Solution 10.2: Finding gaps.
Consider the growth rate and location of the competition to see if there are areas in your community that are not being properly served.
Solution 10.3: Accepting the challenge.
Calm down and understand that competition is a part of business and it’s up to you to leverage this for your benefit.
Accept the challenge, and this will correctly change your mindset.
Solution 10.4: Competition as a part of business plan.
Dealing with competition must have been part of your business plan. If so, then stick to it.
However, if you have missed this part during the planning stage, then the first thing you want to do is not to take spontaneous decisions. Instead, research your competition and prepare a solid strategy to overcome it.
Competition in the context of business planning is a relatively broad topic and obviously out of the scope of this article. For better results, we recommend researching this on an individual basis or simply moving to Solution 10.7.
Pro tip: The best way to research your competition is to become a customer. Buy from your competitors to identify their strengths and weaknesses.
Solution 10.5: Sharing with competition.
Realize there is plenty of business to go around for everyone, even in a saturated market.
While you want more and more of that market share, the fact is that you probably couldn’t handle one hundred percent of it. So be nice and share as long as you get enough to keep going.
This however does not mean that the business should stop competing at any point.
Business is a non-stop growth machine in essence. Once stopped it starts to go down.
Pro tip: Implement a two-fold approach towards your competition.
- Identify the best and the worst things your competition does.
- Match this with what your business does.
- Adopt the best aspects of your competition that your business lacks and get rid of the worst ones.
If implemented correctly this strategy will help you to double win your competitors.
Solution 10.6: Focus on your business.
This is an alternative approach to dealing with competition.
The idea behind this is that the more you focus on your competition, the less your focus will be on your own business.
More time spent dealing with competition = less time spent improving your own business.
Blackberry’s futile attempt to compete with Apple and Google meanwhile moving in quickly to capture the smartphone market is a good illustration of this formula.
Too much focus on competition laid the ground for Blackberry’s subsequent failure.
In Q1 2009 BlackBerry owned 20.1 % of global smartphone OS market share.
This is how the market shares look as of January 2017:
- Android 63.99% 63.99%
- iOS 32.03% 32.03%
- BlackBerry 0.49% 0.49%
- Other 3.49% 3.49%
The universal solution: do not accept failure
In the end, anyone who starts up their own business will need to take all the major risks into account to have the best chance of success.
Preparation is one of the keys to success when starting a small business.
While you cannot take everything into account before you begin, by being prepared for the most common reasons of failure, you can improve the chances that your small business will be successful.
By focusing your efforts on running a tight business model, you can avoid many of the pitfalls that cause small businesses to fall apart.
As we see from the research above, all major reasons for new business failure are somehow interconnected, and almost all of them point to the same roots: poor planning, incompetence, lack of persistence.
The success of your small business will ride in large part on the effectiveness of your planning and research, and keeping overheads at levels that allow your products or services to be purchased by the public.
The more work you do before launching your small business, the better chances you have of enjoying success.
The sole reason for business success is the entrepreneurs themselves.
If you refuse to fail, you won’t fail.
As Adeo Ressi (The Founder Institute) puts this into words: there is only one reason why the business fails – it’s when the entrepreneur gives up.
So, why do small businesses fail?
Because they give up.
Do not give up.
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