Click here to get more information.
Technical
Reference
Bulletin
No. 103
Six Ways to Kill a Small Business
Far too many start-up companies continue to extend credit to delinquent accounts.
While small businesses across America are forming and growing at record paces, the number of business failures still remains high. Depending on which authorities you listen to, anywhere from 50 to 90 percent of all start-up companies fail in their first two years. The state of Washington, by many accounts rates among the highest in the nation for small business failures.
The sensitivity of small companies to changes in the economy and complexities of today’s markets make small businesses susceptible to a variety of problems. The following are six problem areas often cited as leading reasons for business failure. They certainly do not represent a complete list of trouble spots for small companies, and should be considered only as a preliminary review.
1. Lack of Planning.
It is quite surprising how few small business owners and managers prepare or follow business plans. The most common reasons for not doing so are insufficient time and expertise. Too concerned with just making it from one day to the next, many small business people do not consider business planning a critical task. This is unfortunate because the development of clearly stated goals, accurate forecasts and detailed strategic planning is essential to business survival.
2. Under-Capitalization.
Most small business owners do not perform cash projections and have little understanding when and where expenses occur, or how much capital is needed to cover operating costs. The Harvard Business
Review estimated that under-capitalization is directly linked to 10 percent of all failures. Coupled with failure to recognize capital needs is the failure to secure stable financing. Too frequently, start-up companies, unable to obtain bank financing, borrow from personal sources without a proper written agreement and are left stranded when their loans are called.
Review estimated that under-capitalization is directly linked to 10 percent of all failures. Coupled with failure to recognize capital needs is the failure to secure stable financing. Too frequently, start-up companies, unable to obtain bank financing, borrow from personal sources without a proper written agreement and are left stranded when their loans are called.3. Delinquent Accounts.
Although overdue accounts are a problem facing all businesses regardless of size, small businesses can be especially damaged. Often operating on thread-thin margins, many small business owners do not have the reserves to cover when a large accounts lapses in payment, nor do they have the time to pursue collection.
Flying Blind
Continuing to extend credit to delinquent accounts creates a false impression that they have sufficient business to keep the company going. Meanwhile, their outstanding dollars depreciate with each passing month.
4. Failure to Find a Market Niche. Quite simply, if a business hasn’t found a niche in the market to exploit, it most likely will go nowhere. This is not to say that everyone must have the most innovative product or service to be successful, but rather their business should fill a clear void in the market. Their position can be based on product line or service, geographic location, price, or other distinguishing characteristics such as personal service or reliability. Many small business failures could have been avoided had business owners fully researched the market when developing their original business plan. Likewise, test marketing will help small companies discover whether they are on the right track early on, before they make any major investment.
5. Failure to Seek Advice. Running your own business requires a wide range of expertise from accounting to marketing and sales to production. Not everyone is sufficiently knowledgeable in all these areas and while there are a number of resources available to obtain help in the weak areas, few small business people seek it. In addition to the multitude of attorneys, accountants, and consultants in the market, there is a wealth of help to be found through community college and university programs, chambers of commerce, the U.S. Small Business Administration and other agencies.
6. Lack of Monitoring. Perhaps one of the most common failures of many small business owners, and one that proves most frustrating to consultants, is the failure to monitor business performance and recognize when and where problems arise.
Bogged down by day-to-day work, many owners simply do not view their business over the long run. Frequent review of the company’s performance through charts and trend analysis will help identify when trouble is ahead.
Additionally, it is a wise idea to meet often with key employees whose perspectives may prove valuable.
While keeping close tabs on these six areas will not insure success, they will help business owners prepare for, and avoid, potential problems. One note: Though there are no absolute definitions of what it will take to succeed in business, David Birch, a leading authority on entrepreneurs from M.I.T. claims the best indicator for success is a previous history of business success and failure. Birch, interviewed in Inc. magazine, states, “One of the most important things we found out about the entrepreneurial career is that the best predictor of subsequent success is previous decline.” It seems there is little substitute for the school of hard knocks.
Exchange is a publication of: BEC Advisors & Private Equity Services LLC
3003 Northup Way Suite 101
425.635.5000
Bellevue, WA 98004
