When we hear that the leading causes of small business failure are “poor management” and “insufficient capital” that doesn’t tell us much. Either can contribute to the other and there seems never to be a breakdown of what these terms mean.

There can be many entrepreneurial habits that cause trouble and that are involved in a small business failure.

John Murphy, president of Murphy Associates, shares a map of the entrepreneurial minefield to give you a much better chance of escaping the myriad of potential problems that have befallen other entrepreneurs.

 

No one seems really to know just why small businesses fail.  (Here a “small business” is defined as having 15 or fewer employees.)

We hear that 85% of small businesses fail in the first five years.  And we hear that the leading causes of failure are “poor management” and “insufficient capital” but that doesn’t tell us much.  Either can contribute to the other and there seems never to be a breakdown of what these two terms mean.  Poor management can show up in many ways and telling an entrepreneur not to engage in it doesn’t offer much guidance.  Insufficient capital can be the result of poor planning at the beginning or, bad management/use of the funds when the company is operating.  There can be many entrepreneurial habits that cause trouble and there is usually more than one involved in a small business failure.

In an effort to identify a more useful list of possible entrepreneurial trouble spots, Murphy Associates asked for the help of a task force made up of people who have worked closely with a number of small businesses that failed or at least haven’t reached their full potential.  Invited to participate were representatives of SCORE (Service Corps of Retired Executives), Wisconsin Women’s Business Initiative Corporation, U.S. Small Business Administration, and Wisconsin Business Development Finance Corp.  From that came a list of 19 factors in the failures of small businesses.

General business factors

We then developed a questionnaire that we sent to some 40 others who work with small businesses on a regular basis.  We asked them to tell us how prevalent the 19 factors were in small business failures.  We clustered the 19 factors into four groups – General Business, Financial, Marketing, and Human Resources.  Here’s what they told us

Lack of a well-developed business plan was the highest-incidence (in evidence 78% of the time), general business factor in small business failures.  That included insufficient research on the business before starting out, most specifically on the market, its willingness to buy, competition, anticipated operating costs, etc. Not paying attention to the plan after it’s developed was found to be a factor in 60% of small business failures.

That relates to a general over-optimism about achievable sales, money needed, and the ability to do the things necessary to be successful. This was the case 73% of the time.
Insufficient relevant and applicable general business experience was the next most prevalent factor. 71% of the time the management team was just too green in business matters. We don’t know whether it’s a matter of pride, ego, a feeling that as an entrepreneur we just can’t admit we can’t do everything ourselves, or for some other reason. But not recognizing or ignoring what we really don’t do very well and not seeking help from those who know how to do those things was a factor in 70% of small business failures. Insufficient entrepreneurial instinct or inherent talent to run a business – a factor in 63%.
Ineffective prioritization of the uses of both money and time was a factor 64% of the time.
Denying problems in the business until it’s too late to do anything about them. A factor 66% of the time.

Financial Factors

This is the very familiar factor of “being under capitalized.”  Familiar, but it goes beyond just not having raised enough capital to get the business going. That was deemed a factor in 79% of business failures. Even more important was not knowing how to how to manage the money available.
Poor cash management skills or poor understanding of the basic idea of cash flow was the number one failure factor. It was judged to be present 82%.
A related factor is not pricing to make a profit, i.e. not knowing how much it was necessary to charge for products and services to cover fixed and variable costs. A factor 77% of the time.

Marketing Factors

A common blind spot for the entrepreneur is the effort (and cost) required to promote the business and to let the world know they are there.  (The Build-It-and-They-Will-Come syndrome.)

Minimizing the importance of promoting the business properly was a factor 64% of the time.

The entrepreneur’s ego and falling in love with their idea and losing objectivity and customer focus as they relate to product planning was a factor in 55% of small business failures.

Not enough attention to competition is common, too.  Not understanding or recognizing, or ignoring competition – a factor in 53% of small business failures.

Relying too heavily on one client/ customer’s business for success is also a dangerous practice.  A factor in 47% of failures.

Human Resources Factors

Managing, or coaching, people is often not an entrepreneur’s strong suit.   Inability to delegate properly – micro-managing work given to others or over-delegating and abdicating important management responsibilities was a factor 58% of the time.

Hiring the wrong people – clones of themselves and not people with complementary skills, or hiring friends and relatives was a factor 54% of the time.

Poor people management skills, in general, were a factor in 56% of small business failures. 

Not knowing when to hire or fire employees, usually doing both later than warranted was a factor 48% of the time.

Entrepreneurs, take note.  Hopefully, this will provide a map of the entrepreneurial minefield.  If you avoid these mines, you stand a much better chance to escape many potential problems that have befallen other entrepreneurs.

 

John Murphy is president of Murphy Associates, Your Marketing Department, Brookfield, WI, and serves as a part-time Director of Marketing for area companies that don’t have one of their own. He can be reached at (262) 786-7424 or by email at john@marketingwithmurphy.com. Visit www.marketingwithmurphy.com. Contact Judi Murphy at (262 786-7424 or email to judi@marketingwithmurphy.com.