Guard against 13 top small business failures and their causes

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I recently published a collection of the single best startup business advice from a group of small business influencers. Follow that advice, and you have a good shot at success.

Now I want to look at the other side of the coin: What to do if you want to fail.

Okay, I know that no one sets out to fail, but when you’re walking the crazy road of founding a business, it’s easy to fall into a number of holes. Familiarize yourself with this list, and you improve your odds against being caught unaware.

I was tempted to put one item on this list of small business failures and their causes – bad management – and be done with it, because they all trace back to management. And, that’s a big concept I want you to get before you jump into the specifics: Business failure is always a management failure. Don’t try to blame others. You may run into some market conditions beyond your control, but with cost cutting and modifying the vision for your business, you should be able to survive those.

With that preface, let’s jump into the list.

  1. Profit margins slim to none. Like home remodeling projects, the cost of running a business always significantly exceeds estimates. People go in with high hopes and rosy projections. Make sure you’re the one to take the shine off that rose – don’t wait for reality to do it for you.
  2. Unprepared for growth. Do you know what you’re going to do if your business really takes off? Or how you’re going to handle that initial influx of customers excited to give you a chance who won’t come back if you bumble your first encounter?
  3. Operating in the dark. You can’t take your eyes off your financials. If you don’t know the numbers – the real numbers – you can’t make the right decisions. Don’t mistake busy for profitable.
  4. Not enough cash. There are two times when you need a good cushion of cash in reserve: when you’re starting up and when you’re beyond your startup period. Don’t kick off your project if you can’t survive for at least six months without any income. Further, that same reserve will get you through the economic downturns, which are sure to occur.
  5. This often happens when owners implement one “quick fix” after another. Soon they have a patchwork of systems and procedures that saps their efficiency. Going back and fixing everything right becomes too costly. Live by the axiom: Do it right the first time.
  6. Conflicts between partners. It’s sad to say that a lot of partners who have started out as good friends, end up bankrupt and enemies. Sometimes one warring partner buys out the other, but that can be an unsatisfactory resolution for both individuals.
  7. Owner tries to manage at arms length. We certainly like to create businesses that are organized well enough to run without too much direct intervention from ownership. However, when owners stop paying attention to what’s going on, businesses can go south fast. Further, even in large corporations, when the founders stay active and involved, it sets the tone, improves working conditions, and inspires others on the team.
  8. Failure to modernize or lack capital to do so. The Grand Canyon got to be such a big hole in the ground mostly through gradual erosion. Your small business can turn into a money pit if you don’t make continual process improvement a guiding principle. If you suck every dollar out of your business, you won’t have the funds to keep up with the times.
  9. Loss of the biggest customer. You’ve landed the big client you always dreamed about having on board. Things go great…until they don’t, which is the day you lose that client. Manage your business with the goal of minimizing the risk to your company if and when you lose a client or customer.
  10. Failing to find a niche. It’s very tempting to try to be all things to all people, especially when starting out. After all, who can say no to business? However, in the long run, you’ll feel like you’re always swimming upstream. Find a nice, protected little niche where you can swim without always having to battle strong currents.
  11. Refusing to delegate. Refusing to delegate can cause problems two ways. First, owners burnout and this pushes their business downhill fast. Second, they start missing things and perform poorly in areas that aren’t their strong points. In her article on the importance of delegating for the Harvard Business Review, Amy Gallo points out how easy it is to start hoarding work without even realizing it. Check our her piece, it features some excellent case studies.
  12. Location, location, location. For a local business, signing the lease for a bad location is like signing your death warrant. There’s an old saying, “You can’t make a silk purse out of a sow’s ear” and it definitely applies to locations. An expensive new sign won’t help if parking is inconvenient.
  13. Eaten up by competitors. This is often the outcome of a perfect storm of other management oversights. If you take your eyes off the market, fail to modernize, and not watch your financial trends, you can wake up screaming when you realize you’re having this nightmare.

To toss another adage at you as we leave this topic, let me say that “Forewarned is forearmed.” The thirteen small business failures and their causes that I’ve outlined here are very common. The problem is that small business owners can become so consumed in day-to-day management that they don’t see the threats.

Keep your eyes open and be proactive!