Did you say “Why do small businesses fail – nearly always?”

Does that really mean that MOST small businesses fail? Ouch.

Like it or not, 75% of all small businesses in the UK fail within their first 5 years. So, why do small businesses fail ? Let’s take a look:

- Lack of experience This is either lack of experience with the main theme of the business or simply lack of experience at running small business.  Or both.  People who have good ideas don’t neccessarily run good businesses. “It’s my train set so I’ll drive the train” tends to prevail. Personally I would rather employ a train driver. a.k.a. The Intrapreneur.

- Insufficient capital This can be expenditure on capital items as well as working capital i.e. the cash needed on a day to day basis to keep the business afloat. Arises from a combination of poor planning, over enthusiastic sales estimates and lack of a contingency fund.

- Overestimating sales The desire to make the business model work bears pressure on a range of small business startup issues. Not least predicting sales. Sales projections are often based on “how much do we need to sell?” rather than “how much can we sell?”. Sales projections are inevitably based on assumptions. So first and foremost make sure your assumptions are rooted in reality. Then divide the answer by two.

- Overinvesting in fixed assets Resist the temptation to buy some piece of manufacturing kit because it will save 10% off your direct costs. You’re a startup business, you have no sales so you have no direct costs. Much better to start with a product that costs more per unit to produce by, perhaps, outsourcing and invest available funds in creating sales. Then worry about direct costs.

- Personal use of business funds Every penny you spend on your new BMW is a penny lost to grow your business. Owning a business doesn’t give you a right to earn profit. Sort the profit first then buy the BMW.

- Too much business Sounds ironic. Businesses often fail as they chase rapid growth. Why? Because they can’t finance it. Growth generally entails buying new plant & equipment, increased stock holding and inventory well ahead of cash received as a result of that growth. It’s all about the planning.

- Poor planning Or sometimes no planning. The better you have planned your road map, the better the journey. Your small business planning should cover a range of outcomes so there is little chance of catching you out in the event of….

- Poor financial control Part of your business planning process is about recording ongoing performance against plan so you can react to any changes in plenty of time. Most commonly cash flow management is either bad or non-existent. There is nothing more likely to scare off an investor or your bank manager than last minute requests for cash.

- Poor customer service You may have spent so much time and energy servicing your big idea that you have overlooked servicing your customers. Get this right from the outset as it is very difficult to claw it back. “No second chances at a first impression.”

- Underestimating the competition A common failing for ‘big idea’ startups is to imagine that because there is no competition now, it won’t be there in the future. I can assure you that as soon as your idea shows visible signs of success, you will have competition. Plan for it now, not when it happens.

- Give up too quickly Ross Perot, one time US presidential candidate, had an answer for “why do small businesses fail ?”  He said, “Most people give up just when they’re about to achieve success. They stop one yard short of a touchdown”. Then there are those who keep going at all costs. Ah well, no one said this was going to be easy.

- The wrong idea.  Let’s face it, some ideas just aren’t very good.  With all the research and preparation in the world, starting a new business with a big idea is little more than a glorious guess.  The key is being able to recognise it.

The most striking of all these is actually the first. When asked “why do small businesses fail ?”, Dun & Bradstreet suggested that 90% of small businesses fail “because of lack of skills and knowledge on the part of the owner” .

This is striking for two reasons: Firstly that it accounts for nearly ALL business failures. Secondly because it is so easily overcome by use of carefully chosen business advisors, small business consultants or intrapreneurs – i.e. people who know about running business.

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