The U.S. Bureau has some surprising news about small business success rates. The good news is that 400,000 new businesses launch each year across the country. The bad news is that 470,000 go out of business. Why do so many startups fizzle and burn out?
Here are 3 of the most common reasons for small business failures:
Reason #1: Unrealistic Business Ideas
In business, a realistic idea is one that can gain traction in the marketplace. There is either an existing market that you can plug into or there could be a market because your product fulfills an unmet need.
If you start a coffee shop in your local neighborhood, particularly as a franchise owner, you have a good chance of success. The business model has been refined over time and a market has developed around coffee shops. In fact, a whole culture has grown up around this simple idea.
Similarly, when Steve Jobs created the iPhone, there was no market for it, but there was enough interest in this type of device for consumers to rapidly develop enthusiasm for it.
These are realistic ideas.
An unrealistic idea may be brilliant, but it may either be too far ahead of its time or it does not appeal to a broad enough segment of the marketplace to become a sustainable business. Thus, a realistic business idea is one in which there is recognition of the value of the product.
Reason #2: Flawed Business Processes
Sometimes an excellent business idea can go off the rails due to a failure in execution. The manufacturer may not deliver products to a business in time. A business may not have an efficient fulfillment process when experiencing a deluge of orders. There could also be problems with customer service or failing to educate the consumer on how to use the product.
In his article on Business Process Improvement, Tom Ujvagi suggests asking these troubleshooting questions: “Are desired outcomes clearly defined, understood and aligned with company objectives? Does the process have clear ownership and performance accountability? Is the process streamlined, optimized, consistent and standard? Is effectiveness measured with enabling technologies in place to achieve excellence?”
Reason#3: Internal Business Problems
A variety of internal business problems can affect a company. Although the business idea is a viable one and the business process is effective, a small business can suffer from a variety of internal issues related to human resource issues or financial management.
Human Resource Issues:
Three issues that arise in small businesses are conflicts between partners, weak teams, and unexpected success.
a. Partnership Conflicts
Although the business probably started on the strength of a shared passion, it may have begun to flounder due to disagreements about how to manage the business or grow and expand it. Sometimes, one partner may feel that he or she has an unfair amount of responsibility or work. Often tensions can arise due to different ways of looking at things and tempers flare due to the tremendous emotional investment that went into starting the business.
b. Indifferent or Untalented Teams
The business owners may have failed to develop a strong team. Sometimes the team members do not share the founder’s passion and just treat their work as a job. Sometimes, there may be plenty of passion, but not enough talent.
c. Unprepared for Rapid Growth
Sometimes a business can succeed faster than it has the capacity to handle. There may be more demand for their product than they have the capacity to cope. Let’s return to our coffee shop example. A coffee shop in a new neighborhood may result in a deluge of patrons. This can cause all sorts of unexpected problems like slow service, improperly brewed coffee, coffee served cold, or not enough seating room. As these inefficiencies increase, the result may be a large customer exodus from the business due to its reputation for poor service and lousy coffee. Once it’s reputation is tarnished, it may never recover it again.
Financial problems can arise due to insufficient funding or poor cash flow management.
a. Insufficient funding.
The business owner may have launched the business on savings. In fact, a Gallup report says that as much as 79% of small businesses have to start this way because they can’t get external funding. Unexpected expenses may have drained cash flow faster than the business owners had planned. Since the business is new, it is easy to make financial mistakes like trusting the wrong business vendors, being overcharged by service providers, or placing ineffective advertising in print media or radio spots.
b. Poor cash flow management.
Often those who start a business are entrepreneurial and visionary in nature and lack the skill or experience to manage their money better. Even if they do hire someone, they may not know how to find a competent accountant or bookkeeper.
Notice what Isn’t Working
The first step to resolving any problem is to notice what is not working. When problems go unrecognized, they can escalate over time. Many small business problems arise from unrealistic business ideas, flaws in the business process, or internal issues. By addressing these issues, a business has a good chance at success.