5 Reasons small Business Fail. According to Bloomberg, 8 out of 10 entrepreneurs who start businesses fail within the first 18 months. A whopping 80% crash and burn.
But why? What can we learn from the colossal amount of failure with a small business that we can apply to our own business aspirations?
Let’s discuss five(5) Reasons why small businesses fail.
1. Leadership Failure
Your business can fail if you exhibit poor management skills, which can be evident in many forms. You will struggle as a leader if you don’t have enough experience making management decisions, supervising a staff, or the vision to lead your organization.
Perhaps your leadership team is not in agreement on how the business should be run. You and your leaders may be arguing with each other publicly, or contradicting each other’s instructions to the staff. When problems requiring strong leadership occur, you may be reluctant to take charge and resolve the issues while your business continues to slip toward failure.
How to Avoid Leadership Failure: Dysfunctional leadership in your business will trickle down and affect every aspect of your operation, from financial management to employee morale, and once productivity is hindered, failure looms large on the horizon.
2. Taking on Too Much Debt
In some cases, taking on debt is necessary to finance the launch or purchase of a business. However, business owners who don’t prioritize repaying debt and making timely payments inevitably find it hard to grow their operations. According to Guidant’s 2018 State of Small Business survey, entrepreneurs across all industries report a lack of capital or cash flow as a top challenge when running their business, and the weight of debt can make it even more difficult to operate in the black.
To avoid being plagued by debt, more and more business owners are using alternative funding methods like crowdfunding, portfolio loans and even 401(k) business financing to start their ventures. The latter allows business owners to use their existing retirement funds to start or buy a business without incurring tax penalties or taking a taxable distribution. Also known as Rollovers for Business Start-ups or ROBS, 401(k) business financing was used by 22 percent of business owners in 2017, according to our State of Small Business Survey, and it’s becoming increasingly popular for entrepreneurs who don’t want to take on large loans. In fact, ROBS can also be used as a down payment on a small business loan, allowing business owners to preserve their personal savings and even decrease their monthly payments.
3. Lacking Uniqueness and Value
You may have a great product or service for which there is strong demand, but your business is still failing. It may be that your approach is mediocre or you lack a strong value proposition. If there’s strong demand, you probably have a lot of competitors and are failing to stand out in the crowd.
How to Avoid Value Proposition Failure: What sets your business apart from competitors? How do you conduct business in a way that is totally unique? What are your competitors doing better than you are? Develop a customized approach or service package that no one else in your industry is using so you can present it as a strong value proposition that attracts attention and interest.
This is how you build a brand. Your brand is the image your customers recognize and associate with your business. Your brand identity, including your logo, tagline, colors, and all the visible aesthetics and business philosophies that represent your company should be supported by your value proposition. It should separate you from the pack and present your individual perspective to your customers. Do everything you can to present that unique value proposition to your market so you can capture a market share and begin building your conversion rates.
To publicize your brand and set yourself apart, you will also need to step up your marketing plan and use as many venues as possible to present your brand to the public. You may be far better than your competitors but that won’t make any difference if your prospects don’t even know you’re in the game. Use social media, word of mouth, cold calling, direct mail, and other tried-and-true marketing techniques. Ensure you have a well-optimized online presence, develop lead generation and contact information capture techniques such as offering high-quality content on your site, a subscriber newsletter, and information giveaways.
4. Poorly Managing Cash Flow
As business is growing and scaling, it’s important that accounts receivables are managed to focus on cash flow. When companies fail to make adjustments to cash flow while they’re growing, it’s more likely they’ll run out of operating capital — making it impossible to keep ahead of invoices and paying employees. Guidant CEO David Nilssen suggests providing incentives for clients to pay in lump sums early on when having cash on hand in vital. Once you’re a few years in and things are moving more steadily, you can pivot to a monthly or quarterly payment system.
5. Inability to nail a profitable business model with proven revenue streams.
In the end, this is the sum total. Fail to accurately achieve product/market fit where money gets made, and you’re sunk. Entrepreneurs can actually have each of the four above reasons solved, but still miss the business model boat. Twitter is a perfect example of this (although 2013 may be the year they finally turn black in the profit/loss column).
Your Solution: Startups need to move swiftly without spending tons of cash to figure out their secret sauce. Using tools and methodologies such as Minimum Viable Products, Lean Marketing and Experimentation is critical.
A perfect example of this comes from Tony Hsieh’s book ‘Delivering Happiness’, wherein he describes the early days of Zappos. He and his co-founders weren’t even sure back in the late ’90s that people would dare order shoes over the Internet. So they ran a quick test: Up goes a website with shoe images taken from manufacturers’ websites, some buy now buttons and watch to see what happens.
Cha-ching. Order comes through, one of the guys sprints to the local shoe store, buys the requested shoes at full retail, and then scurries home to ship them out. Did they lose money on every pair of shoes shipped? Yes they did. But did they quickly ascertain whether they had a potentially viable business idea? Yes again. All with zero inventory or fulfillment capabilities.
Think and move quickly, ‘fail fast’ if you’re going to fail at all, and nail your business model.
More to read: The 23-Year-Old Programmer Behind Robin