By JT Ripton
Why do small businesses fail? According to a statistics taken from the Small Business Administration, 70 percent of small businesses make it to their third year, and 51 percent see their sixth. This throws the old notion of most businesses failing within their first year right out of the window, but it does still mean that in five years, many businesses will meet their end.
Instead of hoping and wishing that your small business isn’t among the elephant graveyard of failed enterprises, we’ve prepared a list of common warning signs for small businesses. With such an abstract concept, it’s hard to pinpoint just what will cause a business to fail. However, it will still be helpful to read on for a few common reasons that businesses fail.
1. Bad Management
This is commonly cited as the number one reason for small businesses sinking to their briny deaths. Poor management is a cancer to be rooted out. It’s common for a new business owner to lack experience in many relevant areas (like hiring and managing employees, purchasing and selling products, or even just making sure finances are squared away).
The best thing for new business owners to do is to step out of their own way. The sooner they can realize where they’re deficient in experience or knowledge, the easier it will be for them to seek help from others who can help.
Successful managers should promote efficiency and productivity. If a manager lacks focus, vision, and planning experience, it’s easy for a disaster to creep up.
2. Poor Planning at the Development Stages
Why are you starting your own business? If you are a small business owner with the intent to make a lot of money, or you want to work somewhere without anyone to answer to, you may not have a strong enough reason for a company.
It’s always wise to make sure you go into something you have passion for. This won’t make your business last any longer, but it may make you a little more resilient when anything begins to fail. Make sure you are starting a business with a level head and a strong reasoning of why your service or product is necessary.
Consider the type of company you will run, as well. Do you want to be a classical company that requires formal attire? Or do you want your employees to be comfortable and more productive? Many companies set up a specific infrastructure, like BlackBerry enterprise mobility management, to make sure their employees are satisfied and operating at their peak efficiencies.
3. Bad Math + a Declining Economy
If there isn’t enough demand for your product or service, there isn’t much you can do. Dealing with a large group of people is always a gamble, so make sure you’re starting a company that will cater to something that won’t be going away any time soon.
With the recent economic spiral, we’ve see many industries changing drastically. Add updates in technology or changes in consumer demand, and you have an even bigger equation with many more variables.
4. Too Much Growth
I know it sounds crazy, but growth isn’t always a good thing. If you can’t sustain expansion, don’t risk it. It’s sad, but many businesses fall victim to too much expansion after a successful time period. With growth, there needs to be an adequate amount of research to show that the new markets will be just as profitable as your old ones.
It’s also unwise to borrow too much money to cover your expansion expenses, or to borrow too much so that your business can keep up a specific growth rate. Sometimes, less really is more.
5. Business Location
Location is an entire game changer for any business. This can decide whether your business will be a struggling company that thrives or a company that flops and ends up six feet underground. Remember to consider some of these key factors when figuring out where to locate your business:
- Is there a lot of traffic where you plan to locate?
- Will there be enough demand from customers there?
- Are there competitors close by?
- Is the building safe for your employees?
- Does the area have a history of having poor reception for new businesses?
These questions can really get the ball moving to make sure you aren’t jumping the gun on where your small business should be located. Remember, research and planning are the most important things to do before spending money.
6. Insufficient Capital
This is a huge oversight for any company. Not properly tracking what expenses you will need for your operating funds can be extremely damaging to your company. Many new business owners underestimate the amount of money needed to run their business, which forces them to shut their doors before they ever really had a chance.
Be sure to research how much opening a business will cost, and have a plan for how much it will cost to run. Try to find cheap alternatives to non-necessities in your company to save as much money for real operations as you can.
7. Poor Accounting
This one goes well with number six, but it is still a deadly toxin in the infrastructure of your company. If you don’t have experience with accounting, it’s probably a good idea to get someone involved who does — however, that doesn’t mean you shouldn’t know what’s going on.
If a company isn’t paying attention to its numbers, it is essentially flying blind. An outside company doing your accounting will not watch over your company. That’s your job.
8. Mediocre Productivity
People don’t generally think they do a mediocre job, especially when it comes to their main source of income — however, we’re not all above average. Try to engage your employees as much as possible. If you can inspire them to the greatness you believe they can meet, they’ll be more likely to produce more.
With more minds invested in your company, you won’t just work better as a team — you’ll be more aware of inefficiencies you didn’t spot. Other workers will recognize things that can be changed, and it is wise to listen.
Small businesses are tricky: the success isn’t all up to you and your work ethic. It’s a massive conglomeration of other workers, finances, planning, and even location. Still, by knowing some of the common pitfalls, you can always try to reduce your chance of disaster by taking precautions.
JT Ripton is a freelance writer out of Tampa, who focuses on topics relating to business and technology. Follow him at @JTRipton.