When The Going Gets Tough...Small Businesses Fail: 10 Common Mistakes

33 percent of new small businesses fail within the first two years. 56 percent within the first 4 years. Increase the your odds for success by knowing the 10 common problems small business owners face.

Small Business Administration (SBA) statistics show that 1/3 of all new businesses fail after two years, and 56% fail after 4 years. While there are many reasons for a small business to fail, there are 10 mistakes which are common to most of them. This article briefly examines, and proposes solutions to, each of them so you won't be next.

1. Not Enough Cash.

Most businesses fail because they lack enough cash at first and, as a result, take on excessive debt. Before you set off on your adventure, make sure that you have sufficient cash to operate for the next 12 months, using your worst case scenario. Then, pay careful and daily attention to your finances; carefully record cash inflow and outflow. Make sure you are familiar with accounting principles. No need to become a CPA or even take an accounting class. Widely available and very affordable software packages, such as Quicken, make it easy to be your own bookkeeper. Of course, if you can afford it, the services of an accountant who has extensive small business expertise is the still best solution.

2. Spending Too Much, Too Early.

Cash on hand is King! This needs to be the Golden Rule for start-ups and small businesses. Many entrepreneurs and small business owners have a fundamental misconception of how business operates. As a result, many spend their seed money, or start-up capital, before revenues start rolling in. Best is to seek the advice of veterans who can act as your conscience, without the emotional involvement, before making a big financial commitment. Seek out people within and outside your network who have been there. SCORE and SBA are probably the best, and free, available resources. Of course, if you are using an expert you can expect to pay a fee.

3. No Rainy Day Cash.

When the going gets tough...small businesses fail! In part, that's because most start-ups and small businesses fail to set aside cash reserves which can be tapped when the market sours; there are unexpected (and impossible to anticipate...do your homework) cost increases; raw material price increases, if you are a producer, etc. Make sure you set aside enough cash (again, cash is King!) to stay in business when sales slow down due to market and/or seasonal trends.

4. Growing Too Big, Too Fast.

Ah, the sweet taste of success! Let's get more!!! Too many owners grow too quickly without really determining whether they should, or even whether they can afford it. They want to add a location and/or add employees, or buy more equipment (often the latest gadget with all the bells and whistles, not necessarily simply what is functional). Business owners get into trouble when they fail to perform a financial and market analysis. To avoid this fate, start with realistic goals (often your worst case scenario) and allow yourself to grow as needs, analysis and financial ability, not gut instinct, dictate. Let your present level of revenue, not the most optimistic financial projections dictate when and whom you hire; when and where to expand; and when to purchase or lease new equipment.

5. Location, Location, Location.

Too many retail owners are not savvy negotiators and sign what they think are "cheap" leases. Consider all factors before signing on the dotted line. For example: how many businesses like yours are located close by? Can cars easily move in and outof your parking lot? Are there enough parking spaces? Are you visible from the street? Is there sufficient foot traffic? And many, many more. Make sure you speak to an attorney who is experienced in reviewing/negotiating leases for small businesses, as "hidden" clauses can, and will, hurt you.

6. Inexistent Internal Controls or Poor Execution of Existing Controls.

Number 1 on my list is poor financial controls. However, too many times I have experienced start-ups and small businesses with lack any type of work process necessary to ensure that things are done consistently. Furthermore, small business owners and entrepreneurs generally lack the experience and skills to hire the right people, monitor their performances and deal with them when they don't work out. Training is another area which is generally and largely neglected. Finally, customer service is inconsistent or non-existent. As a result, generally business owners end up working for the company, rather than the company working for them. This makes it very difficult to succeed. So make sure to establish protocols for how each task is to be accomplished, train yourself and your employees to follow them, and make sure they are revised and updated frequentlyu (see #10).

7. Poor or No Business Plan.

If you fail to plan, you're planning to fail! A well drafted business plan is your road map to success. If nothing else, having to write a business plan forces you to think about the what, when, where, how and why (yes, why) of your business. More importantly, it forces you to think about, and consider, your financial needs and resources. There are a number of well-written books and software packages that can help you write a business plan. There are also a number of companies and individuals, myself included, who can help you. However, in the end, it would be best if you did it yourself. If you do end outsourcing it, make sure you do the homework (i.e., market research, financial projections) or at least be deeply involved in the research. At the very least, make sure you understand what someone else has done for you. Don't be afraid to ask questions and challenge assumptions (remember what happens when we assume!).

8. Ineffective Marketing and Self-Promotion.

People can't buy what you have to offer if they don't know it is available! Sounds logical? Yet, many small businesses fail to develop an effective marketing strategy, or set aside enough money to implement it. While you can, and should, still use "old-time" media such as direct mail, ads in local newspapers, radio and TV (much cheaper than you might think if done locally), you should not forget electronic media such as websites, blogs, etc. Of course, each of these medium has its proper place and which one(s) you use, when and how, should be carefully examined before committing. A good source of information for those selling products is a book titled "The 4-hour Workweek" by Tim Ferriss (I get no residuals or fees to plug the book). which has a trove of ideas on how to test your marketing campaign inexpensively. The number of advertising and promotional ideas is limitless, or rather limited by your own creativity and that of those around you. Speak to as many successful small business owners as you can and ask what methods they used and then ... think! Don't do it just because they did. Think whether you can afford it, and whether their ideas have a high probability of increasing your revenues.

9. What Competition?

Loyalty is earned not bought. An existing customer who is willing to purchase your product or service again is your best customer. Don't lose him/her. Make sure that your customer has a reason, or better yet multiple reasons, to continue doing business with you instead of your competition. The best way to do is to establish a relationship with your customer. People buy from people they like and trust. Again, there are many excellent books on how to best do this. Better yet, go to your competition and see what they do, how they act, etc. You may learn what to do, and most likely will learn what not to do. Then go to your favorite store and think about what makes it special. Why you go there and not next door.

10. Failure to Accept, Nay Encourage, Change.

My personal favorite. "Nothing changes if nothing changes", my grandmother used to say. "Everything always changes", my grandfather used to say. They were both right. And, if evolution has taught us anything, it is that those who don't adapt ... die. Stay alert. Recognize opportunities and remain flexible to adapt to changing times. Better yet, drive the changes. This holds especially true for your work processes. Constantly ask yourself and your employees, if you have any, what is working and what is not. Always question how things are done and wonder how they could be improved,made cheaper, faster, more durable, more exciting, etc.

11. Bonus...Being Penny Wise and Pound Foolish.

How many people do you know who refuse to spend money to make money? They rather spend $10 to make $1,000, then spend $1,000 to make $10,000. Same rate of return, but very different results. Too often small business owners refuse to seek and pay for the professional help they need because they fool themselves into believing they either know how to do it, or will figure it out. Know where you lack experience and/or expertise and consider hiring someone who does.

Best luck to all!

Jean-Pierre Ruiz
Corporate troubleshooter and special agent to the Business Owner/CEO Bellevue, Washington