Ten Reasons Why Small Businesses Fail

For most entrepreneurs the best part of starting a business is the initial planning, when it all seems possible and the endorphins are running high. During this honeymoon phase it’s hard to imagine that there is a 50% chance that you won’t make it through the first year; on the contrary, you are probably confident that you will be one of the 4% of ‘real’ entrepreneurs who stay ahead and build strong and lasting companies.

Allon Raiz, the CEO of Raizcorp, who has helped more than 220 small businesses become sustainable over the past ten years, says the reality is that it always turns out to be tougher than you expect. Those curved balls come at you with a spin on them that would put Shaun Pollock to shame. If you are not well positioned to deflect them you’ll be out before the umpire can lift a finger.

Here Raiz offers his ten top reasons for why the majority of small businesses fail:

1. You don’t have blue heart

At Raizcorp the ‘blue heart’ is the unquenchable spirit of an entrepreneur that Raiz talks about it in his book, Lose the Business Plan: What they don’t teach you about being an entrepreneur, (Bookstorm Macmillan, 2010). It’s that stubborn but optimistic determination that enables you to persevere in the face of challenges – the ability to pick yourself up and keep on going, over and over again. Not everyone is cut out for this, says Raiz. The Global Entrepreneurship Monitor has found that only 9% of people are natural entrepreneurs. If you don’t have it in you, that’s fine – you probably have a different role to play in society.

2. The wrong business model

You have not developed a business model that works. For instance, if you have a model of low margins and high volumes of sales (m|V), and you also give your clients long payment terms, you are going to run out of cash. Furthermore, small increases in your expenses or discounts offered to clients can seriously erode your profitability. If have a high margin / low sales model (M|v) but you don’t have the right expenses and payment structure, you will also run into trouble. For instance, in a service-based business that gets lucrative contracts, you may need to spend a lot of money on getting a job done to the client’s satisfaction. You have to implement the right payment structure to sustain this.

3. Unrealistic expectations

Entrepreneurship is not an easy journey. Too many people start a venture with an overly-optimistic vision of how the business will develop and are profoundly discouraged when they encounter setbacks. You need to be prepared for all potential challenges and not be caught off guard. Entrepreneurs who succeed are the ones who have a balanced, pragmatic and well-informed view of what can be achieved.

4. Not enough personal runway

Start-up entrepreneurs should ensure that they have enough personal funds on hand to sustain them through the early difficulties; above all, your fall-back piggy bank needs to hold at least double the amount that you expect you will need. Just as when building a house, unforeseen expenses are virtually guaranteed. Too many new businesses fail because the owner runs out of money to pay for his personal costs before the business starts to generate an income, and he simply cannot continue.

5. Partnership disputes

When partners all pull together during the early days, their relationships are usually strong. But when the business starts to make money or starts to expand the trust between partners can be severely tested. All too often, because of differences in values, one partner feels aggrieved and disputes arise. When a partner wants out and the business does not have the money to pay out his share, this can bankrupt the business. It is critically important for partners to not only share the same values and work ethic, but also to put in writing the systems and processes for which each is responsible. A ‘divorce clause’ that protects the business in the case of partnership fall out is also advisable.

6. Bad credit policies

Inexperienced business owners are often fearful of asking their clients for money. Because they are anxious about keeping their clients, they don’t implement firm account collection and rely on trust to get their money. But bad payers and slow payers are inevitable, especially during times of economic downturn. A small business relies on the life blood of cash flow; if your clients are only paying you after 30 or 60 days the results could be disastrous. Never allow your clients terms for payment without getting them to do a credit application and, if necessary, do a creditworthy check on your clients before you offer them credit.

7. Fear of financials

The value of doing monthly management accounts cannot be sufficiently iterated. Without these, how can you see the reality of where your business is going? If a small business is to survive and grow, the business owner has to learn to stay on top of the finances and, in particular, learn to interpret what the numbers say. Even though you may employ an accountant or bookkeeper, the analysis of the financials is your responsibility. If you do not do this you will not be able to anticipate problems and plan yourself out of them.

8. Dependence on a single supplier or single customer

This is the old eggs-in-one-basket problem. You start your business, you pick up a big client who takes up all your time and you give 110% to that client to deliver an outstanding service. You may need to hire more staff and increase your capacity, but it’s worth it because thanks to this client you are doing so well. Then the client does not renew the contract and you go broke. The same applies to using only one supplier – she’s the best in the industry, her quality cannot be matched; but her warehouse burns down and you can’t get stock and you go broke. There is no room for complacency around clients and suppliers if you want your business to thrive.

9. Fear of selling

Hard to believe when you see it in black and white, but countless entrepreneurs go into business without having the confidence to sell their own product. In a highly competitive environment, you have to overcome such fear. If necessary, get a life or business coach to help you overcome this weakness. Also make sure that you have something unique to offer – if you are excited about your USP, it is much easier to sell. You have to get out there and just do it.

10. Life happens

Random events can prevent you from running your business efficiently. Family pressures top the list. Debt, divorce, illness, death – life happens and you just can’t go on. Sometimes women who run their own businesses have to cope with an unexpected pregnancy. Then, even with the best will – and domestic help – in the world, it is very hard for a mother to give her full attention to her business if she has a new baby to care for. Running a small business is a life-consuming occupation; it is inevitable that when circumstances beyond your control get in the way, the business will suffer.

One thought on “Ten Reasons Why Small Businesses Fail

  1. There are three reasons why businesses fail.
    Cash flow, budgets and quality.
    If you do not have cash flow for the low seasons it fails, especially in the early days. We started a business 6 years ago and had to get overdrafts to stay alive. We started with an idea and out of that it became a thriving business.
    If you do not have a budget, what plans do you make to grow…
    Every year we plan to grow 20 % and 2 years ago it was 20,4 % and last year 19,7 %. This year it is 20 % again.
    Lastly quality in product, service and business.
    All these named in the article above are artificial.
    Even people doing everything above without cash flow cannot survive.
    If you have all the above without budgets to grow, you will stay small.
    If your quality is not the best, now one will buy your products or support you!!

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