Why Small Businesses Fail
Success in business is never automatic. It isn't strictly based on luck - although a little never hurts. It depends primarily on the owner's foresight and organization. Even then, of course, there are no guarantees.
Starting a small business is always risky, and the chance of success is slim. According to the U.S. Small Business Administration, over 50% of small businesses fail in the first year and 95% fail within the first five years.
In his book Small Business Management, Michael Ames gives the following reasons for small business failure:
Lack of experience
Insufficient capital (money)
Poor location
Poor inventory management
Over-investment in fixed assets
Poor credit arrangements
Personal use of business funds
Unexpected growth
Gustav Berle adds two more reasons in The Do It Yourself Business Book:
Competition
Low sales
More Reasons Why Small Businesses Fail
These figures aren't meant to scare you, but to prepare you for the rocky path ahead. Underestimating the difficulty of starting a business is one of the biggest obstacles entrepreneurs face. However, success can be yours if you are patient, willing to work hard, and take all the necessary steps.
One fact reported by SBA this year has been that "8 of 10 small business start-ups are no longer in existence after five years due to lack of management knowledge and skills." While I realize that "no longer in existence" does not translate into "absolute failure" it appears that the "8 of 10" is extremely high. These are troubling statistics.
Six Most Common Blunders That Lead to FailureBlunder 1: Amount of Effort Exerted
The single most important factor in determining who succeeds and who doesn't is simply the amount of effort exerted. If you aren't ready and willing to work - and work hard - being an entrepreneur is probably not for you. For starters, most people are used to working and 8-to-5 job, with a "boss" directing them. When you're in business for yourself, you must have the discipline to work independently. You must maintain the same work schedule of the same number of hours virtually every day even if you don't have anything scheduled.
Also, many people assume that when they own their own business, they'll be able to work less and take more time off for recreation. Unfortunately, the opposite is true. When you run your own business, you usually have to work more hours, not fewer. You have to be willing to put in long hours and, if necessary, work weekends as well. This is especially true in the start-up stage.
Blunder 2: Inadequate Financing
A considerable number of people have unrealistic expectations when it comes to the funds needed to start a business. They often lack the necessary start-up funds and can't come up with adequate financing. Furthermore, a considerable number have virtually no cash or liquid assets and expect either a bank or the Small Business Administration (SBA) to provide 100 percent financing. In most instances, neither a bank nor the SBA will provide someone with financing unless that person is investing a significant portion of his or her own funds, boasts a good credit record and has the means to pay back the loan.
Most people wrongly assume the SBA will provide them with 100 percent financing based solely on their good ideas. But if someone has no cash at all, it usually reflects poorly on his or her ability to manage finances -something the SBA takes into consideration. Funds may be derived from cash savings, personal credit lines or family loans.
Blunder 3: Lack of Planning
Another fact rarely considered is that the majority of new businesses fail within a few years mostly due simply to poor planning or no planning at all. Most people who go into business enter a field related to their current employment or a favorite hobby. They don't do a market study first to see whether the demand for their product or service is growing, declining or stagnating.
They also fail to allot the proper time for administrative tasks. Most new business owners assume the majority of their time will be spent producing and marketing their product or service. Unfortunately, this isn't the case. An inordinate amount of time is spent on administration - talking on the phone, purchasing supplies and equipment, filling out government forms, and taking care of other mundane duties. Internet business-to-business services are helping to cut down the time factor of some of these duties; however, it's still a relevant oversight.
Blunder 4: Unrealistic Expectations
Many individuals assume not only that most businesses succeed, but that they're lucrative from the get-go. This is definitely not the case. Generally speaking, it usually takes at least a year to develop a profitable business. The first year's goal is usually earning back your investment. Even then, the money has to be reinvested in the business. In other words, in your first year, you should have other sources of income to live on.
Blunder 5: Inability to Commit
Even though most people would like to start their own business, only a small percentage actually do it. When push comes to shove, most lack the self-confidence to make a decision and act on it. In order for the business to succeed, they must be able to gather information, weigh the facts and then make a prompt decision.
Blunder 6: Unwillingness to Take Responsibility
A business owner is 100 percent responsible for his or her mistakes. There's always a risk of a business failure or less-than-expected financial return. If that should happen to you, you can't blame it on someone else. If you would like to start a small business, you must thoroughly and objectively analyze the feasibility of your idea. Failure to do so can have a tremendous personal cost on finances, relationships and family ties.
Source:
http://www.moyak.com/papers/small-business-failure.html
