Avoid the Top 4 Reasons Small Businesses Fail

Interested in becoming a successful entrepreneur? Passion, perseverance, and baby steps are essential to success, writes Larry Alton in Entrepreneur. And to translate that passion into a successful small business takes specialised skills and ability to use the tools available. Using the employment measure of small business, there are 2,065,523 small businesses in Australia employing less than 19 people. Despite the significant contribution of small businesses to the economy, many face significant challenges to remain afloat. You may have heard troubling statistics that most small businesses don't survive. While the vast majority of businesses in Australia are small, accounting for 97 percent of all businesses, they're shutting their doors in alarmingly high numbers. According to the Australian Bureau of Statistics, more than 60 percent of small businesses cease operating within the first three years of starting. While it is true that some businesses don't survive, many in fact do. By understanding the most common reasons why small businesses fail you can give your business the boost it deserves. Aside from difficulties getting financing and raising capital, small businesses typically fail for 4 major reasons: lack of market research, inadequate financial management, unclear sales and operations data, and human resource challenges. So whether you're just beginning to foray your way into entrepreneurship, or you are an established small business owner, here is some advice for small businesses on how to become a successful entrepreneur.

1. Do Market Research to Avoid the 'Field of Dreams Fallacy'

Before starting a new venture or rolling out a new product line, make sure there's a market. Not everyone will want your new line of waterproof bath towels or is willing to make two right-hand turns to visit your coffee shop. Agencies specialising in market research can help aspiring entrepreneurs evaluate their ideas, locations, and strategies. Salt Lake City's Small Business Development Council's Market Research Manager, Robert Head, states that 'market research is critical and often ignored.'

“One of the biggest reasons small businesses fail is the 'Field of Dreams Fallacy,'” says Jim Herrin, Director of the Salt Lake SBDC office. Referring to the movie, Field of Dreams, where Kevin Costner's character builds a baseball field in the middle of his cornfield, after hearing a voice that tells him 'If you build it, he will come.' And as promised, the cornfield baseball diamond becomes the playing field for baseball greats like Shoeless Joe Jackson.

However, while the 'if you build it, they will come' mentality may work in the movies, you can't expect the same success in business, says Herrin, who stresses that market research is imperative. “Find out critical issues early,” he emphasises, explaining that many companies—even high-tech companies—will develop, build, and perfect products without validating their ideas with potential markets.

 

2. Manage Cash Flow Strategically

Managing cash flow is a significant challenge to most small businesses. “If you need to buy materials and pay the vendor in 20 days, but customers pay in 60-90 days, that gap is critical,” explains Herrin. “You might have great revenues, but can't bridge that gap. You can literally grow yourself out of business.” Herrin counsels small business owners to use credit as a tool to bridge the gap between expenses and revenue to maximise cash flow potential. “It increases your risk, but if you manage it well, it can work for you.”

A warning Herrin gives about how to become a successful entrepreneur is “If you're going to fail, fail fast,” meaning don't use debt as a bandage if the company is bleeding out. It may sound harsh, but if your business is going to be one of the ones that don't succeed, don't make it a long and drawn-out process.

3. Keep Good Records, Collect Meaningful Data from the Outset

When starting out, it's easy to think you're small enough not to take record keeping too seriously. That's for when you grow bigger, right?

Wrong. Keeping accurate records and tracking data from the outset will allow you to make vital course corrections in the early stages of your business. Jill Blankenship, CEO Frontline Call Center offers this sage advice: “Develop a daily P&L and ask yourself 'Are we making money today or losing money today?' This will allow for you to fix a problem quickly or continue to do the things that work.” Providing yourself with information about your operations allows data-informed decisions to replace guesswork. Daily feedback allows for daily corrections.

Keeping accurate records and understanding your customers and the market will help you gauge your potential. Market research in the early stages and daily or weekly projections help measure the pulse of your business. “Take a few minutes each week to analyse,” counsels Herrin.

If you need additional help in this department, try implementing a good CRM program to help you keep track of customers, interactions, and your sales pipeline. CRM software allows businesses to enter leads and follow those leads through the sales pipeline. A database of customer and lead information, CRM programs help you and your sales team monitor the activity and progress of accounts and potential accounts. Of the customers using Salesforce Sales Cloud, 37 percent report an increase in revenue after implementation.

Having a CRM in place will help you with better data tracking to avoid having leads slip through the cracks. CRM also helps monitor sales progress, and adjust your daily business decisions.

4. Hire the Right People

While market research, cash flow management, and record keeping are all essential to your small business success, don't ignore the importance of building an effective team of employees. Having the wrong people in your organisation can be nothing short of disastrous. Personnel issues come in a variety of maladies, but the most harmful to small businesses are poor work ethic, spreading rumors, and personality traits, explains Herrin. “If it starts affecting others,” he warns, “it can completely devastate a company.”

Another serious staffing issue is finding the people with the right skillset. Herrin states that often businesses can't grow because they can't get the right people. Attracting qualified candidates usually means offering more competitive wages. “It's going to raise the level of compensation to attract skills,” he explains.

Starting a business isn't easy, but for many it represents the ability to pursue their ambitions. The allure of working on your own schedule doing what you love can quickly be overshadowed by the dire realisation that your small business demands a great deal of time and effort.

But for many, that is beauty of their business. Noah Thomas Leask, President and CEO of ISHPI puts it this way, “Do not underestimate the amount of effort, perseverance, and discipline that is required to be successful. I cannot stress that enough. There will be problems and you must be ready mentally, physically, and spiritually to deal with them. If you are starting a business to get rich and work less, than you are on the wrong path. One should be working on enjoying the journey not thinking about the destination.”

Having a realistic understanding of your market, the proper financial and sales data practices, as well as the right people will help you avoid the common reasons small businesses fail but more importantly, help you to focus on steps to help you succeed.