Why Do Small Businesses Fail – Part 2

The truth behind small business failure.

In our last post we looked at the top five reasons, according to many business support associations and professional advisers, for small business failure. Our evidence indicates the belief that these failures can be attribute to either one or a combination of, lack of capital, poor cashflow management, lack of sales, poor business model and or a lack of planning and research. While on the surface it is easy to understand why it is thought that these are the causes; our experience and research indicates that these are in fact symptoms rather than causes.

The truth is less attractive, but avoidable.

It sometimes appears that blaming business function is easier than looking closer to home! Once you start to look at these mainstream causes, which, I must admit my colleagues prefer to call symptoms, you’ll begin to see that the truth of the matter is all these popular so-called causes are in fact all in themselves caused by the human element of business.

Chris Batten in his book ‘Making Rain’, points out to us that the gap between success and failure can look like a chasm when viewed from the side of failure toward success. When viewed the other way around the chasm becomes the smallest of gaps that are all too easy to bridge. The failure in fact comes from a much simpler cause than the complexities of funding, cashflow, low sales, business models and planning and research! The unattractive truth is failure comes from a lack of knowledge, the wrong mindset and a lack of logical thought and process.

If each enterprising or entrepreneurial person were to spend more time at the front end of their journey ensuring they were totally prepared, the failure rate would significantly decrease. In this case we are talking about the total failure of the business not minor failures that can be attributed to the ongoing development of the business and its opportunities; in most cases these minor failings ultimately result in learning and development albeit in the shadow of setbacks!

Avoidance

The most suitable cure for this failure rate will come from the individuals desire to embrace the concept of constant learning and the maintenance of the right mindset. It is not enough just to be positive, blind positivity can just as easily lead to failure as no positivity! The mindset is one of positiveness but also a desire to accept nothing at face value and to research and check everything. For each assumption made it should be tested before it is rolled out across the entire business.

Lack of capital is avoided by understanding your market. Understanding the barriers to entry and exit. Knowing in detail your cost base, cash burn-rates. A full appreciation of  time considerations (however long you think it will take add 20% at least to get a better view of the true cost before you spend). This will tell you how much capital is needed. Get used to running a lean business, run it as if is always in recession!

Learn the art of realistic cashflow forecasting don’t massage the figures for the sake of vanity, be realistic and manage every penny coming in or going out! The same is true of sales and forecasting. But also make sure your market wants what you have to offer, in the way that you are offering it!

Learn from your competition, direct and indirect and then shape your model accordingly. Don’t go into anything in business without a well-researched and structured plan and before you commit, ask plenty of ‘what if’ questions!

With the right attitude, a learning attitude, a deep desire to create success and an ego that is totally under control, you will be able to learn the essential lessons from others. These lessons will aid you in avoiding the failure that can come from lack of research and planning before the event!

The key is to research and plan, research and plan, discover and react, and accept that sometimes it is okay to slow down, or even stop to avoid the risk of failure. It is also okay to pivot and change direction to suit your new learning.

Business failure can be avoided by accepting you don’t have all the answers and you just don’t know, what you don’t know! In private life not knowing can be acceptable, but it is never good enough when you’re in business for yourself. Ignorance is not an excuse. Not knowing is dangerous and you should do all you possibly can to Learn and implement your learning. Always seek to learn from others, not just by what they say but what they do and sometimes what they don’t do; review the results they get or fail to get!

In out next article we will start to drill down into this subject even further to help you avoid the trip hazards of business!