Why Small Businesses Fail: 6 Financial and Accounting Traps that Small Business Owners Fall Into

Businesses start and fail at a staggering rate. Every year over a million people start a business of some sort and by the end of their first year at least 40% of them will be out of business. Within five years, more than 80% of them will close. In 10 years, 96% of them will be out of business. Why does this happen? Businesses fail for a lot of reasons but ultimately because of one reason: the business is no longer financially viable.

Let’s take a closer look at why businesses fail from a financial perspective:

1. Lack of a business plan or budget. If you fail to plan, you plan to fail. Every business needs a plan and a budget to make sure they are meeting expectations and operating according to their plan. A budget allows you to review the performance of your business monthly and adjust your plan as needed. You need a budget to project a profit and a separate budget for your cash flow. A business can be profit rich and cash poor. Most owners don’t know that their profit position and cash position are two different things.
2. No marketing plan.  This goes back to budgeting. Too many owners never put together a plan to determine the volume they have to do to make money. How many cups of coffee do you have to sell at X dollars? How many pipes do you have to repair to make a living? How many times does a customer have to come into your store for you to break-even? What helps drive your business: direct marking, radio, cold calling, word of mouth, referrals, print ads or the web? How much will you have to invest to bring business in using these methods?
3. Lack of capital. You have two things to consider: How much will it take to start your business and how much operating cash is needed? Will you need to borrow or bring in an investor?  Most owners don’t consider all factors before starting a business.
4. Uncontrolled growth.  Some businesses grow too fast and either can’t manage the expenses that come with growth or can’t manage the cash flow. When a company is growing rapidly, cash can be tight and is constantly being used to fuel the growth. Do as much as you can to systematize your cash flow.
5. Pricing is too low.  If you are really busy and not making any money, you probably have a pricing problem. Make sure you make a profit after directly paying for your product or service. If you don’t, it won’t matter how much you sell. You will lose money on each unit. More business fail because they don’t charge enough – not because they charge too much. Raising prices is something most small business owners fear. Ask anyone that has done it – see what they tell you.
6. The business owner not having the critical skills to run a business. Many business owners go into business because they are a great chef, lawyer, mechanic, etc. They possess the technical skills of delivering their product or service but once the business is established, it requires another hat; that of an owner. This is where they must learn the business skills and tools required to run a business; create a budget, manage cash flow, make collection calls, manage employees and understand their financial statements.

Most business owners cannot read the dials on their dashboard or what accountants call their financial statement. Your monthly statements will provide you with certain indicators:

• Monitoring your payable and receivables
• Monitoring your costs and trends in sales
• Watching your debt
• Profits after selling your widget

Running your business can be like driving a car. You need the knowledge and skills to read the dashboard and then the skills and tools to drive. Not paying attention can lead to mistakes – mistakes that may cost you your business.

To learn more about the critical skills and tools to run your business for the long haul, please contact us or call (414) 269-8705.