By Paul Gori :: Saturday, April 21, 2012 :: 21659 Views :: :: Community & Culture, Business & Finance
|One of the least understood aspects of entrepreneurship is why small businesses fail, and there’s a simple reason for the confusion: Most of the evidence comes from the entrepreneurs themselves.
We interviewed a number of Chaldean small business entrepreneurs about what they believe is the cause of business failures.
Some of the Chaldeans we interviewed had business failures themselves; others shared what challenges close friends and family members faced that caused their business to fail.
The interviewed included a questionnaire, discussion, and follow-up questions in order to gain a better understanding of the challenges. We sampled 138 Chaldean businesses in California, 43 in Chicago, and 206 in Michigan. We grouped the common causes in the list below, which does not have any specific order.
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. Changes in the market occurred or the initial idea was not properly examined in light of a through market study. This would also include a start-up trying to compete against Best Buy and its economies of scale.
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 (even employees and vendors who can’t do their jobs). They may be perfectionist, greedy, self-righteous, paranoid, indignant or insecure. They place family loyalty over business competency, such as hiring a favorite nephew instead of a more talented employee. You get the idea. Sometimes, you can even tell these owners the problem and they will recognize that you are right — but continue to make the same mistakes over and over.
This one might be the saddest of all reasons for failure — a successful Chaldean 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.
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, and it happens all of the time. Why? For one thing, it is a common — and disastrous — misconception that an outside accounting firm hired primarily to do the taxes will keep watch over the business. In reality, that is the job of the chief financial officer, one of the many hats an entrepreneur has to wear until a real one is hired.
Lack of a cash cushion.
If we have learned anything from this recession 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, change in laws, credit, or new fad. These things can all stress the finances of a business. If that business is already low or out of cash (and borrowing potential), it may not be able to recover.
Repeat and referral business is critical for most businesses, as is some degree of marketing (depending on the business). Operating a mediocre business by failing to improve goods or services or consistently finding better ways to compete.
Paying too much for rent, labor, and materials. 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.
Lack of focus, vision, planning, standards and everything else that goes into good management. Throw fighting partners, confused employees, or unhappy relatives into the mix and you have a disaster.
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 Chaldean family businesses do not make it to the next generation.
A declining market.
Book stores, music stores, printing businesses and many others are dealing with changes in technology, consumer demand, and competition from huge companies with more buying power and advertising dollars.
In life, you may have forgiving friends and relatives, but entrepreneurship is rarely forgiving. Eventually, everything shows up in the soup. If people don’t like the soup, employees stop working for you, and customers stop doing business with you. And that is why businesses fail.