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Why Do Small Businesses Fail? You need to know…

First, a little sideways rant to warm up your cockles, and get you thinking?

What I really hate is organizations that do research on topics like this. Someone is being paid to go and find out some facts, and publish something that sounds right.

Usually all this research – often directly or indirectly paid by the tax payer – comes up with some dribberish that is so generalized that it makes my eyes water.

For example, according to the Australian Centre for Business Growth (somehow associated with University of South Australia) – the TOP reason for SME failure is:

“Insufficient leadership and management (13%) added to insufficient planning and execution (12%)”. These two ADD UP to 27% – because you CAN two number together (for no reason) so that the combined reason becomes the #1.

The next item called “Inadequate market research, marketing, sales” apparently only accounts for 17% of SME failures…

“Poor financial management” at 14% in third spot.

Let’s dispense with the PR mush, and realize the above mentioned company has a very profitable side business that sells (wait for it) – courses to CEOs of SMEs to help build their “leadership skills – how to lead and manage growth – and includes doing some action planning. Good for them.

Now – what actually causes businesses to fail?

If we go “BIG” picture we can say the failure was due to LACK of Strategy, LACK of Execution (doing the wrong things or doing them poorly), LACK of people organization, or very commonly LACK of cash.

See – you cannot really argue with all of these very good reasons – you need to have enough of these buckets filled enough or your business is doomed.

But let’s brainstorm some real life reasons. Just for fun…

1. A lot of businesses do not ‘fail’, they just stop. After 1, 3, 5, 21 or even 54 years – the owners decide to not bother any more. The business, has no value for sale – because the owners did nothing (apart from their life time) to give it any. You know the kind of business – where very little has changed in decades. Maybe some new equipment when the old stuff finally dies. Commonly, the owners “had a red hot go” at some strategic business building 20 years ago – and “failed” on the first try. Never did it again. You will see the main example of this when they ineptly “put on a manager”, and attempted to scale up. It went wrong – which is about a 99% chance on the first go without experience. So the owners LOCKED IN a “may as well do it myself” policy – because “You just can’t get good staff these days (for 3 decades).
2. A partnership break up or a divorce is often a good reason for business “failure”. Two or more partners finally realize that both would likely be better off in different businesses. Why? Maybe because they never actually learned the simple skill of devising a “vision” or “direction” or “theme” or anything that they both agreed on (and was strategically effective).
3. Run out of money. Either because of lack of understanding about cashflow, or just because of massive underfunding to start with. It takes a special person with an effective strategic plan, AND necessary skills to grow from a “shoelace” to a riding boot. With the wrong setup – there are situations where the faster you grow – the faster you go broke – while still making a profit!
4. No understanding of the strategic value of positioning, or marketing, or anything related to giving your sales team (whatever that looks like) something so say/advertise/share other than “we do everything that every other ____________ does, but exactly the same.” If you want to go broke – just copy about 99% of other businesses in your industry. With most you could just change the name at the top of the website, advert, or even brochure (if you are old enough to remember them). Be sure to only say things that every other business in your industry could also say. You know: best quality, friendly service, we care, general stuff. Certainly do not attempt to define a segment or niche that would allow you to alter your offerings so you COULD actually say things that your lame competitors cannot. Not doing this is likely (effectively) at the CORE of every business failure.
5. Had no understanding of “lifetime value” of a client or customer. This is closely tied to number 4. above. If you do not strategically, repeatedly and with utmost diligence determine the methods and cost of BOTH attaining a new (targeted) customer/client, and of KEEPING those clients in your fold – you are yet to “get it”. Most business failures I came across (usually too late) – no one had EVER thought about or spent a single dollar to keep your flock happy for repurchase. (Or maybe it was a very lame effort – which is equally dumb.)
6. Here is a simple one to fix. No simple statement about your business or your products or service or experience that resonates with your target customers. So your products are somehow different (real or perceived) – so you have something to promote – and your target customer instantly recognizes what you have is for them.
7. No clue where their customers came from, or what it cost for that to happen. Why did their customers choose them this time? In these internet days – data is very nice. Traffic/views/conversion rates/repurchase rates/AB split tests of ads/landing pages/emotional messages/offers, and more. Much more. You might also go broke if you go too far down the data rabbit hole. You must know your “metrics” and where your big “levers” are.
8. Apart of the many more real world “reasons” for business failure there is one ELEPHANT sitting right there. Where you have a puny baby – the nurses use the term “failure to thrive”. This description fits a vast percentage of businesses (and business owners). Failure to thrive? What does that mean? It comes from a failure to “commit”, once a reasonable strategy has been elected for use. The business owner talks about planning, but does not execute, or does not execute well or consistently. The output is ok. Reasonable. But variable. This can contaminate your team, or just ensure mediocrity. This is not a personal attack – it issue is usually about lack of clarity, or lack of skills in determining priority of action. Usually the owner works a gazillion hours a week, doing “work” – but not getting the rewards needed. And this effort can last for decades. This final item on this list is about knowing that all tasks in a business have a “weight value”, that means they are NOT all equal. It means that at any time, there is ONE most important task. It depends on your vision, your strategies, your rules. If you don’t know what it is for you, then that is the where having a decent coach will change your game statistics.

Did you see how I did that? Yep – you now realize that the most important thing, the best way to not fail, is to know what game you are playing, what are the rules, and most importantly – how do you win at your business game?

If hard work created success in life and business, those guys that mend the potholes with toxic hot tar in the blazing sun would have most of the money. The guys that dig ditches by hand would be pretty close on the “Top 100 Big Earners” list.

If you want to find out about my Business Coaching Program – Click Here.