10 reasons why businesses fail

Posted Monday, February 17, 2003

An English actor on his deathbed once muttered: "Dying is easy. Comedy is hard."

Apologies to that expiring thespian, but watching a small business die is never easy, if for no other reason that it can happen in so many different ways. And, no matter the cause, it's never funny.

Here, in hopes that a bit of foreknowledge may make a dent in the death rate, are the top 10 reasons small businesses fail:

1. Undercapitalization. Money's not only the root of all evil; it may well be the leading cause of small-business failures. Far too many small-business owners underestimate how much money they're going to need, not merely to get the business up and running, but also to sustain it as it struggles to gain a commercial foothold. Norman Scarborough, an associate professor of business administration at Presbyterian College in South Carolina, says, "Once you start out undercapitalized, that can start a downward spiral from which you can never catch up."

2. Bad cash flow. This is the macabre cousin to inadequate capital. Even businesses that move past the embryonic stage often collapse when incoming cash doesn't at least offset expenses and other costs. Watch your "burn rate" (a buzzword coined by dot-com firms, which somehow reveled in how much available cash they were torching). As Scarborough puts it: "When it comes down to it, cash is what really counts."

3. Inadequate planning. Not surprisingly, this is the reason problems like capitalization and bad cash flow happen in the first place. It's critical that you map out as comprehensive a business plan as possible, covering financial issues, marketing, growth and an array of other elements. (For more on business plans, see these articles.) Granted, it can be time consuming, as a well-prepared plan can take weeks or months to complete. "But that's the time to find out an idea may not work," says Scarborough. "If you don't plan and still go ahead, you may end up with heartache and thousands of dollars down the drain."

4. A competitive edge. Genuinely unique ideas are as rare as honest CEOs these days, but it's still critical that your business gain a toehold in some sort of singular niche that you can exploit. Be it a slightly different product or customer support that goes beyond your competitors; earmark that one element that sets your business apart. "Too many small businesses are simply 'me too' operations," says Scarborough. "Make sure something is unique or different."

5. Mushy marketing. Your mother knows you're special, but what about your prospective customers? It's essential to develop a marketing strategy not merely to identify who might buy from you, but why. Make certain your marketing strategy sets you apart so a customer can clearly see why she'd rather go to you than a competitor.

6. Inadequate flexibility. From stacks of cash to battalions of seasoned employees, every small-business owner knows the advantages a larger competitor brings to the game. Well, one thing he can't necessarily do is turn on a dime, something small businesses can exploit. Never forget to remain flexible. If a product isn't quite right or a marketing campaign isn't really flying, don't be afraid to tinker. Making those sorts of in-course adjustments is much more unwieldy for the big guys.

7. Ignoring the next step. Recently, I wrote about a hardware store owner who practically imploded when a clerk volunteered to trim a bolt for me (see this story). To be blunt, that's the sort of cavalier disdain you might expect at a larger operation. Don't let it happen at yours. Make sure you and your people emphasize complete customer support, from doing things you don't have to to offering thoughtful, useful advice that goes beyond the ordinary.

8. Forgetting there's no red 'S' on your chest. Entrepreneurs are a smart, resourceful bunch, but running a small business carries its share of hidden kryptonite. Don't try to be all things to your business. If you cringe at the thought of maintaining complete books, don't hesitate to hook up with a good bookkeeper. When a legal issue crops up, don't rely on your home-baked juris doctorate to evaluate the legal ramification. Establish a long-term relationship with an attorney; preferably one with small-business acumen.

9. Great boss, mediocre staff. The hardware store incident mentioned earlier underscores how a solid business with a knowledgeable, enthusiastic owner can often be brought down by inexperienced and unmotivated employees. Make certain your employees are well-trained, fairly compensated and somehow share in the fire that burns in your belly.

10. Uncontrolled growth. Ironic as it seems, but a small business that simply succeeds too quickly often pushes itself into an early grave. If your production fails to keep pace with demand or necessary expansion coincides with insufficient cash, the growth you dream about as an entrepreneur can actually threaten your business' very existence. Again, cover foreseeable growth in your original plan and track it adequately to make certain that it never gets dangerously out of hand.