3 reasons your small business could fail and what to do about it

July 20, 2021

6 minutes to read

Opinions expressed by Contractor the contributors are theirs.

Running and growing a small business is no easy task, and a dark cloud is always present: failure. About 50% of new businesses fail in the first five years, with some industries, like the restaurant business, seeing significantly higher percentages. As an entrepreneur, I’ve always felt like I had a monkey on my back reminding me that even the most ambitious newcomers can falter. While completing an MBA at the University of Warwick, I even chose to write my dissertation on small business failure – interviewing over 100 entrepreneurs whose start-ups have closed.

As I went through the associated Q&A, some trends emerged; of the top 12 contributing factors, three applied to 92% of these sad stories.

1. Cash

Ninety-six percent of the homeowners I surveyed said they closed due to lack of money and / or a business bleeding them dry. For most readers of this article, the goal is probably to start or grow. What I learned is that achieving both aspirations costs money – with far too many people saying “they didn’t know things would be so expensive.” This lack of diligent capital planning has proven to be one of their biggest drawbacks.

“Steve”, for example, owned a party rental business outside of Austin. For starters, he needed considerable capital to purchase inflatable houses, tents, tables and other set-up items, and underestimated the needs for the first 90 days by $ 26,000. Instead of funding, he paid it all in full, as the busy season was approaching and he couldn’t afford any delays. Things did not end well; It took him longer than expected to gain market traction, and over time he couldn’t make his payroll, paid himself a dime, and spent all of his emergency fund.

Here are some steps you can take to make sure cash doesn’t bankrupt you:

Plan Correctly: While it sounds hopelessly simple, remember to ask two essential questions: Are you aiming to grow and put all your money back into a business, or do you plan to start up and be profitable right away? Each has radically different implications for cash needs. And make sure you have reserves – you can afford to operate without taking a lot out of company coffers.

Consider adopting a profit mindset: This concept has been around for a long time, but small business author Mike Michalowicz made it official in the 2014 book, Profit First: A Simple System To Turn Your Business From A Money Eating Monster To A Money Making Machine. Simply put, he advises, instead of adopting the formula “sales – expense = profit”, rewrite it as “sales – profit = expense”. The risks of not embracing this shift that I have seen too often: entrepreneurs pay themselves last. They also let all the money go to other expenses – overhead, other salaries, etc. The “profit first” ethic ensures that you pay yourself first. One of its methods is the use of clearly defined bank accounts. I am a big supporter and I personally use it in my business.

Related: 7 Guerrilla Marketing Tactics That Will Grow Your Business When Money Is Scarcer

2. Lack of commercialization

A staggering 87% of business owners I surveyed said “they do very little or no marketing.” As the owner of a marketing agency, this touches me deeply. I had assumed that the essential nature of this area was understood, especially when starting a business. Instead, the owners I spoke to tended to focus almost exclusively on the product / service. “Gabrielle”, for example, spent eight months building her dream: a Mexican restaurant. She oversaw every detail of the construction; there was not a single thing she did not allow. With enthusiasm, it opened in July, then only invested $ 600 in marketing in the first two months. On October 15, she had closed the doors. There weren’t enough customers to support the business and they were throwing food away. His dream had become a nightmare.

Strategies to consider include adopting a “marketing first” mindset. When starting a business, no one knows you exist. There is no “If you build it, they will come.” »Never assume that setting up a physical site and / or site will naturally generate a flow of customers. Next, develop a simplified 90-day marketing plan. What will you do each day from this list? What are you going to invest in? How do you track success? Focus on online and offline marketing. Finally, make sure you have enough financial resources for the task. Don’t invest all your money in building something brilliant and have zero dollars to market it; a budget of 10 to 20% of the estimated turnover is a good starting figure, depending on the business sector.

Related: Why Your Business Should Be “Marketing First”

3. Personal life challenges

This also surprised me. Almost seven-tenths of the entrepreneurs I interviewed discussed the extent to which a small business has affected their personal lives, or the other way around. “Anthony” opened up about his divorce and how it has put a strain on his business, draining finances as well as his energy. “Sarah” spoke of working 80 hours a week and slipping into a deep depression – a depression that ultimately cost her essential employees and almost all of her clients, forcing her to close and take a job. These were just two of the many stories with striking similarities.

Some actions to consider:

• Decide on the type of business you are going to start, using your unique personality as a filter. For example, I started a lifestyle marketing agency and designed their growth strategies around my lifestyle so that I could take time off when needed. If you are looking to build a high growth business, anticipate and build in a significant amount of “real life” time from the start, because it will still be required of you.

• As a corollary to the point above, allow quality time. Don’t sacrifice small business success if it means missing out on all of your family’s milestones. And certainly don’t be that parent.

• Contact other small businesses. Ask them how they are doing. A little moral support goes a long way. I can attest to this advantage, having been a member of the Entrepreneurs’ Organization. Connect with like-minded people and share your personal and professional trials and tribulations.

Related: The balance between your personal and professional life is simple. To be successful at work: Live!

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