Thursday, January 13, 2011

10 Reasons Why Small Businesses Fail

IN THE NEWS from The New York Times

There's this myth that the one thing successful "technopreneurs" in Silicon Valley have in common is that they all have failed at least once. If it's true, then it's reason to rejoice for someone like me who has already tasted bitter failure in founding and running a business; at least, I already have that one little detail taken care of in my quest for billions. If not, then let's all try our darndest to benefit from the mistakes of those who have come before us and avoid needing to learn this most expensive lesson first-hand.

1. The math just doesn’t work. There is not enough demand for the product or service at a price that will produce a profit for the company. Diligent market research is key in avoiding this mistake.

2. Owners who cannot get out of their own way. They may be stubborn, risk averse, conflict averse -- meaning they need to be liked by everyone. They may be perfectionist, greedy, self-righteous, paranoid, indignant or insecure. The biggest problem may have is yourself.

3. Out-of-control growth. This one might be the saddest of all reasons for failure -- a successful business that is ruined by over-expansion. This would include moving into markets that are not as profitable, experiencing growing pains that damage the business, or borrowing too much money in an attempt to keep growth at a particular rate. Sometimes less is more.

4. Poor accounting. You cannot be in control of a business if you don’t know what is going on. With bad numbers, or no numbers, a company is flying blind. If you have no idea how accounting works, learn it (you can start with this post and this post), or get a partner who is familiar with it; you can't rely on your external accountant to do the important things like financial planning for you.

5. Lack of a cash cushion. If we have learned anything from the financial crisis two years ago, it’s that business is cyclical and that bad things can and will happen over time -- the loss of an important customer or critical employee, the arrival of a new competitor, the filing of a lawsuit. These things can all stress the finances of a company. If that company is already out of cash (and borrowing potential), it may not be able to recover.

6. Operational mediocrity. No business owner will describe his or her operation as mediocre, but we can’t all be above average. Repeat and referral business is critical for most businesses, as is some degree of marketing (depending on the business).

7. Operational inefficiencies. Paying too much for rent, labor, and materials (something I have unfortunately learned the hard and expensive way). Now more than ever, the lean companies are at an advantage. Not having the tenacity or stomach to negotiate terms that are reflective of today’s economy may leave a company uncompetitive.

8. Dysfunctional management. Lack of focus, vision, planning, standards and everything else that goes into good management. Throw fighting partners or unhappy relatives into the mix and you have a disaster.

9. The lack of a succession plan. We’re talking nepotism, power struggles, significant players being replaced by people who are in over their heads -- all reasons many family businesses do not make it to the next generation.

10. A declining market. Book stores, music stores, printing businesses and many others are dealing with changes in technology, consumer demand, and competition that will most probably render them obsolete in the next few years. In short: don't enter a dying industry.
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