Eight out of 10 small businesses fail in the first 18 months. I ran my own small business for a dozen years, taking it national and then selling it. I have also acted as vice president in three other businesses with 10-100 employees, coach CEOs, mentor startups at MIT, and have many small businesses as clients. As a result of this experience, and talking with countless other small business executives, I believe that these are the five main reasons why so many small businesses fail:
- They don’t understand their customer and the customer’s needs and wants
The first thing that any business needs to do is understand who its customers are and what they will pay for. Many business owners think they know what the customer wants, or think that their idea is so great that of course people will pay for it, but too many find out after spending considerable amounts of time, money and energy that they were wrong. Even big companies make this mistake, of course; countless new products are introduced every year and many fail, but big companies have the resources to survive that failure, many small businesses do not. For too many it’s one and done.
Another manifestation of not understanding the customer is being spread too thin: a company has too many products and services and doesn’t focus on the ones that it does best and that customers truly value.
And poor customer and market understanding can also lead to poor pricing: either the offerings are too expensive and don’t sell, or they’re priced to low and critical amounts of money are left on the table.
The simplest way to better understand customers is to talk to them – an activity that many small business owners are hesitant to do. This is the cheapest time to learn, and the more customers you talk to before opening a business or developing a product the more likely you are to have success when you do. And in many cases these informational interviews will uncover customers who will say, “Yes, when you come out with that contact me because I would buy it.”
- The business is under-capitalized
As the old saying goes, it takes money to make money. Some businesses start out of the home and require very little investment, but as you take on employees, rent, marketing, and other overheard – not to mention the cost of producing and delivering the product and service – companies can run into cash flow issues.
Developing a product takes time and money. Getting new employees up to speed and productive takes time and money. If customers are paying in 60 or 90 days, but your bills are due in 30, what are you going to do? Even a profitable company can fail if it doesn’t have enough working capital to see itself through to when payments arrive, and to survive in the inevitable (and often unpredictable) slow periods.
- They don’t plan
Running a business by the seat of your pants is not a long-term strategy. Larger companies have strategic and operational plans, and small businesses should, too. In today’s rapidly changing business environment that plan doesn’t need to extend beyond a year, but having annual goals, budgets and plans in everything from revenue generation to product development to marketing can be indispensable.
And then you need to employ the daily, weekly and quarterly tactics to make sure your employees stay on plan and meet goals.
- They fail to execute
A company may understand the customer, have enough financing, and have a plan but still fail because it fails to execute. This is very common: the company sticks with plans for a few months but then loses focus and goes off on something else. They don’t actually get their product to market, or they don’t put enough marketing behind it for long enough to make it successful. The sales team is not well managed and doesn’t close deals. Customers can’t get support when and how they want it and start to drift away, dissatisfied.
- The owner can’t delegate and get out of the way of the people who know how to do their jobs
In many cases the real reason behind the previous four problems is this one. There are lots of great ideas for businesses, and ultimately however you phrase it usually the business succeeds or fails due to the quality of the management: their knowledge, skill, agility and resilience.
Most small business owners are knowledgeable in their field, but they may not have the wide range of experience and knowledge needed to manage and grow a business. Too many think that they need to know it all (or, even worse, think that they do know it all). They refuse to delegate to the people who could help them grow.
I recently saw noted inventor (400+ patents) and entrepreneur Dean Kamen on a business panel and a person in the audience asked why so many startups fail. Kamen answered, “Because the CEO won’t get out of the way of the people who really know how to do sales and marketing.”
While founders may (or may not) be personally good at sales, they can’t do everything. Sales management, marketing, strategic partnerships, product development, operations, legal, HR, budgeting and finances are just a few of the areas that they will need to get expert help on if the business is to profitably grow bigger than just a handful of people.
Many successful business people have learned these lessons the hard way. Henry Ford and Walt Disney are just two examples of people whose first businesses went bust but were later very successful. (One lesson that Disney learned was to leave the operations and finances to his brother Roy and to focus on his strength: the creative.)
Learning from others is the easier way. Fill in the form on the right, or call me, and we can talk about the issues at your company and how I can help you make your business more successful.
President, revenue + associates
I coach small business executives on how to improve their business results. How can I help you make your company more successful?