We know from statistics that 80% of businesses fail in the first five years of operations. After 10 years of running my own businesses and working directly with other entrepreneurs, I have discovered a pattern to failure.
Here are my seven reasons why businesses fail and what the entrepreneur can do to avoid them.
1. Failing to plan equals planning to fail
Extraordinary events like fire, flood or any other insurable claim can devastate a business which does carry ample insurance. Planning for disaster is not a fun exercise but it's necessary to plan for it just in case it happens. Insurance should include lost of profits, key employee wages and possibly management salary. Anything that could hurt the business as it rebuilds needs to be accounted for.
Some businesses are heavily reliant on staff. It is imperative to plan for problems with staff, customers, landlords. Is there a backup plan if an employee calls in sick? What happens if a customer has a bad experience and complains online? Is there a legal lease agreement with the landlord that was reviewed by a lawyer? Lawyers are expensive by an unscrupulous landlord can take advantage of a poorly written lease contract to seize the leased premises for a more profitable tenant.
2. Lack of adequate capital
Getting into business the first time, is an exciting and scary time. Most new entrepreneurs leverage their homes, their savings, and their future earnings to invest in their new adventure, not leaving enough cash to help through the first two years of operations. As the business is building, too often there is little to no cash on hand to support day-to-day operations. If there isn't enough extra cash, the landlord could seize the space, the suppliers could cease deliveries, the customers could stop buying due to lack of inventory. All because there wasn't enough upfront capital.
3. Lack of mentor
Many new business owners get into business in an industry they are familiar with. Michael Gerber calls this the "Fatal Assumption" in his book, E-Myth Revisited. "Knowing the technical work of a business is the same thing as owning a business that does technical work". Unfortunately, in most cases, the new entrepreneur may be fantastic as a technician but doesn't know what she is doing as a business owner, and fails. Having a mentor to help guide the new entrepreneur through tough decisions is critical for anyone wanting to get into business.
4. Lack of business systems
McDonald's is the greatest business in the world run by 16 year olds. Systems make the business simple so kids can work there and still deliver the same level of consistency expected by its clientele. Backyard barbecuers make a better burger than McDonald's, but not nearly as consistent. Every business needs systems to do the same for its clientele. Receiving a remarkable burger followed by an average one on a second visit is worse than receiving an average burger all the time. The real objective in systemization is to offer something remarkable every time.
5. Personal issues cross the lines and affect business.
Some entrepreneurs take their business personally. It makes sense as they pour blood, sweat and tears into their dream company. The lines between a personal life and business life get blurred. Whatever happens away from work is brought to the office. These actions have an effect on the employees, the customers and ultimately the business. Some personal issues can include death or sickness of loved one, personal struggles with spouse and or children. The entrepreneur must learn to separate work from home. It's difficult to leave work at work when things aren't going well there, just like it's not easy to leave home at home when things go badly there. Mainly because many entrepreneurs live their lives through their work. The people they interact with most are employees. It's in the best interest of all involved to separate "Church from State" when dealing with these issues. The business depends on it.
Too many entrepreneurs focus on the competition. Competition does not kill another business. It puts it out of its misery. Engaged entrepreneurs are motivated by increased competition. It helps attract more clients to the area and it ultimately grows the overall demand for the product. It's not competition that kills a business. It's complacency. Complacency attracts competitors who want to do a better job than the incumbent. Complacency drives customers to the competitor. Complacency creates employee turnover, pisses off customers, attracts competition and drives down profitability.
7. Lack of focus
An entrepreneur has to have laser focus. She needs to have clear, concise, SMART goals for the week, month, and year. SMART is an acronym for Specific, Measurable, Achievable, Realistic and Timeliness. With focus, the entrepreneur navigates the business through rough waters like a ship's captain, keeping the destination in mind. Without focus, the entrepreneur stumbles, riding the entrepreneurial wave like a surfer not knowing where they'll end up, just hoping they have enough skill to ride the wave long enough not to end up crashing into the rocks.
With a background in finance and marketing, Rick Nicholson owned two highly successful restaurants before selling them to start a consulting business. His current company The Restaurant Ninjas provides tools to the foodservice industry to become more profitable. His book, "The Art of Restaurant Theft" can be downloaded for free at www.therestaurantninjas.com
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