Business Advantage October 2008

Why do some small businesses fail?

We’ve all heard that half are gone within a year, and 80% within 5 years. What’s the secret with those that survive and prosper?


How often does a business owner complains about the government, the weather, the this, the that, for the failure of their business. When, in fact, for most businesses, the statistics tell a very different story.


1.                   32.1% fail due to poor management of financial activities.

If there’s one area that’s a ‘weak link’ for most businesses, this is it! The vast majority of business owners and managers do not have a great deal of formal financial management skills or training. Let’s face it, most aren’t accountants!


2.                   14.6% of small businesses fail due to a lack of management competence or experience.

Business owners or managers are often very good at doing the technical work of their business. Unfortunately, that might not mean you automatically have the skills and experience required to really make the business go.


In this instance, a lack of experience in actually managing a business can be its downfall—being good at what a business does does not necessarily guarantee that the person will be good at managing the business. This makes training, seminars, and information gathering critical to your business.


3.                   12.4% of small businesses fail so due to inflation and economic conditions.

These are conditions affected largely by internal government controls on currency and interest rates and by other world-wide financial mechanisms. These conditions can also be altered by the effects of weather or natural disasters on an area, a country, or a region of the world. Obviously, these factors are outside your control as the business owner.

4.                   12.3% of small businesses fail due to poor books and records.

You never know how much money you have in the bank, where that came from, or who and what you owe, and so on. Ultimately, you have to know where you stand financially at all times. Without that, keeping your customers happy will be difficult, let alone making sure you’re profitable!


What you can measure you can manage. Without understanding the numbers, you’re flying blind.


5.                   10.7% of small businesses fail due to sales and marketing problems.

Many businesses throw good money after bad simply because they just don’t know whether their advertising or marketing actually works. Another marketing mistake made by many businesses is to have a constant focus ONLY on winning new customers.


6.                   9% of small businesses fail due to staffing problems.

Most people want more than a job, and most business owners want team members who will treat their work like more than a job! And despite all the best intentions and desires of both parties, often both will end up with a less-than-perfect situation.


You can rectify this by involving your team members more in the overall operation of the business, in projects outside of their jobs, more team activities, more training and education and better communication, just to mention a few.


The other issue here is that businesses are often over- or understaffed for their volume of sales. Either of these situations will put undue pressure on the business—higher costs or overworked staff and unhappy customers.


It’s essential to review productivity, too. You see, you could have the appropriate number of staff but, due to a lack or systems or poor work practices, they could be producing very little. This then affects cash flow. All of a sudden, your business can’t deliver in any area.


7.                   6.2% of small businesses fail due to union problems.

As you may have seen, unions can affect businesses dramatically. In fact, union movement can affect whole industries or entire countries, depending on which union is taking action.


8.                   2.7% of small businesses fail due to failure to use external advice.

This small category represents the group of businesses that would not have failed had they sought external advice. In other words, people out there could have assisted the business. This external advice could have come from accountants, lawyers, business advisors, and so on.




9.                   So where does this leave you?

Add up the percentages of reasons for small business failure that are external to the business—that is, outside the business owners’ control.


10.               So where does this leave you?

It’s about 18.6%, isn’t it? Inflation and economic conditions at 12.4% and union problems at 6.2% are the only 2 factors outside the control of a business owners or managers. So outside influences account for only 18.6% of the reasons why small businesses fail.


Only 18.6% is outside your control!

These results show that as much as government policies and economic conditions affect business, your actions and that of your team have a far greater effect on your results than absolutely anything else.


You must seek assistance in the things you’re not strong in. And that’s one of the reasons franchises have a much higher success rate. Proven systems, no trial and error.



The material herein is of the nature of general advice only, and neither purports, nor is intended to be advice on any particular matter  that is tailored to your specific circumstances. Neither this firm nor any member or employee of the firm undertakes responsibility in any way whatsoever in respect of reliance solely upon this material, including any errors or omissions howsoever caused.

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