WHY BUSINESS FAIL

Recognizing signs of failure - and strategies for avoiding it

BY CHRISTINE JANKLOW

According to the Small Business Administration, nearly 45,000 businesses close each month.
Declining consumer confidence, massive layoffs, credit constraints and foreclosures are only
part of the increasing pressure that will likely lead to record numbers of business failures,
closures and bankruptcy in the coming years. Is there any light at the end of this tunnel?
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Yes! Proactive positioning can make all the difference between survival and demise. Since my
area of expertise is facilitating turnarounds, I will focus on five common reasons (even in a good
economy) why small businesses fail. Many of these causes are preventable with proper
planning, advice and education. Therefore, accounting professionals and trusted advisors are
going to play a critical role in becoming the "first response" to aid in managing the crisis on
behalf of your business clients.

FIVE REASONS BUSINESSES FAIL

1. Loss of revenue. Lost income and a declining customer base may be due to
circumstances beyond your client's control, such as the current economic climate. This
also may be attributable to other factors, such as pricing, location, declining market
share, or even slow- or non-paying customers.

2. Poor business models. While losing revenue is problematic, it is most often

because the original or existing business model is no longer viable. Business planning
(and measuring) is essential to ensure that opportunity and competitiveness are
optimized. A business model must also be executed properly for the entity to realize
revenue.

3. Management/operational issues. Entrepreneurs by nature may not possess (or

employ) the proper balance between ownership and management skills. If internal
management is insufficient, the effects are usually strongly reflected on the bottom line.

4. Lack of capital. All businesses must have sufficient working capital. A business
should strive to maintain a balance sheet that can support three to six months of payroll
and operational expenses, to maintain a cushion for unforeseen loss or crisis.

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5. Credit/debt issues. Many businesses have relied on access to easy credit in the
form of lines of credit, credit cards, loans and home equity lines of credit to finance their
businesses. Small businesses are now struggling as a result of tighter lending, high-rate
credit cards, reduced lines and maturing loans, leaving many heavily burdened with
mounting and high-cost debt. (I will discuss some alternatives to provide relief and
substantially reduce debt exposure in the second part of this article.)

Any of these elements can wreak havoc on a business. Most would agree that the loss
of revenue can damage a business the most. In addressing the loss of revenue,
businesses and trusted advisors can begin by examining key factors such as operating
expenses, receivables, pricing, service or product offering, and inventory to assess
areas where cash flow can be improved.

Craig Szabo, CPA, of Szabo Accountancy in Calabasas, Calif., notes that, in his
experience, loss of revenue is the key reason that businesses fail: "We have seen many
more business failures, and everyone seems affected by the economy. We all used to
have a cushion (savings, available credit lines and home equity); now, with credit so
impacted, clients don't have the resources to salvage a business if it is distressed."

Revenue loss coupled with being over-extended is a deadly combination. Improving

upon these conditions is predicated on how prepared a business is to handle loss,
utilize available resources and manage cash flow. Owners who suffer revenue loss
often begin to manage their businesses from a cash-at-hand position. Remember that
bank balances and cash balances are two different forms of cash. Rarely will they ever
resemble each other. Be clear on cash projections so they can be utilized for
improvement. Accountants can play a vital role in providing this sort of cash
management and measuring the results of changes needed to help in stabilization.

In concert with this, the business model and plan needs to be carefully evaluated to
determine if the present business model is still viable.

Michael Stoddard, CPA, of The CPA Network, in Provo, Utah, has always advised his
clients to review their business models periodically to ensure viability. Now more than
ever businesses must be encouraged to proactively plan to enable survival and ensure
sustainability. This should include careful and realistic assessments of, and
improvements to, business models, management skills and financial stability.

In evaluating business models, Stoddard asks, "Can the model generate revenue? if not
there is little hope. If it can, you can always fix it." Doing so has its price, and may call
for tough choices such as downsizing, repricing and reducing debt.

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Timing is essential in making changes during a crisis, first to identify the key issues, and
then to implement measurable actions. Unfortunately, as advisors, we are sometimes
called in too late. If a business is exhibiting signs of failure, one should not forget that
even the best entrepreneurs don't wear a big red "S" on their chest. If things have gone
from bad to worse, that would be an opportunity for the advisor to begin forming (or
executing) a dissolution plan that can wind down a business cost-effectively and
properly.

Yet another factor in the deterioration of business models is managerial weaknesses.

The Dun & Bradstreet Business Failure Record states that "incompetence, unbalanced
experience and lack of managerial experience create issues in areas such as operating
expenses, receivables and inventory."

Other key issues include overstretched and overstressed owners and personnel. Brad
Marks, chief executive and founder of Brad Marks Enterprises, a Los Angeles-based
executive search firm, feels that owners need to seek means to strengthen cash
positions so that key personnel can be retained, rather than discarded and later
replaced at significant cost. He suggested examining both fixed and unfixed operational
expenses prior to considering layoffs.

Even now, growth opportunities are plentiful, but not without working capital, and lack
thereof can halt even a strong business model. In tougher climates and without good
cash management, a normally well-capitalized business can rapidly turn
undercapitalized.

Compensating for that deficiency is where problems can arise. Once again, enabling
reserves and building up balance sheets can determine survival in lean times. When it
comes to utilizing credit, many owners lack understanding of appropriate options and
the costs associated with borrowing. Without credit or collateral, lending options are too
few; some report that even venture capital activity is at a 12-year low.

DEALING WITH DEBT

Then there is the matter of debt. In my experience, this can be a silent killer, and one
that can be truly devastating to the finances and morale of a business.

When squeezed with higher rates, or diminished cash to afford payments, many
businesses adopt a knee-jerk reaction to fixing the problem. One typical response is to
appeal to creditors in hopes of lowering interest rates, or reducing payments. Most will
find that creditors are unsympathetic, and some of the few relief programs offered can

3
take up to five years to complete and are null if defaulted upon. A worse response is to
become non-compliant with tax filings or payments. We have seen a significant rise in
clients with large amounts owed in back taxes. Debt is so stressful when not managed
that it can take focus off making money and use valuable resources in dealing with
demanding creditors.

However, there is a viable option to strengthen cash flow and reduce liability exposure
called business debt negotiation that can provide significant financial relief to the
business debtor. In the second part of this article in the next issue, I will provide specific
details about this option, which can strengthen balance sheets and enable recovery for
small and midsized businesses.

Christine Janklow is president of SettleSource Inc. (www.settlesource.com), a Los

Angeles-based business debt negotiations firm.

(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.

http://www.webcpa.com/ http://www.sourcemedia.com/

The Seven Pitfalls of Business Failure

by Patricia Schaefer

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Summary: When you're starting a new business, the last thing you want to focus on
is failure. But if you address the common reasons for failure up front, you'll be much
less likely to fall victim to them yourself. Here are the top 7 reasons why businesses fail
and tips for avoiding them.

www.bupa.co.uk/business

The latest statistics from the Small Business Administration (SBA) show that "two-thirds
of new employer establishments survive at least two years, and 44 percent survive at
least four years." This is a far cry from the previous long-held belief that 50 percent of
businesses fail in the first year and 95 percent fail within five years.

Brian Head, Economist with the SBA Office of Advocacy, noted that the latest statistics
are a much more accurate assessment of new business success rates, and that "as a
general rule of thumb, new employer businesses have a 50/50 chance of surviving for
five years or more."

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Better success rates notwithstanding, a significant percentage of new businesses do
fail. Expert opinions abound about what a business owner should and shouldn't do to
keep a new business afloat in the perilous waters of the entrepreneurial sea. There are,
however, key factors that -- if not avoided -- will be certain to weigh down a business
and possibly sink it forevermore.

1. You start your business for the wrong reasons.

Would the sole reason you would be starting your own business be that you would want
to make a lot of money? Do you think that if you had your own business that you'd have
more time with your family? Or maybe that you wouldn't have to answer to anyone else?
If so, you'd better think again.

On the other hand, if you start your business for these reasons, you'll have a better
chance at entrepreneurial success:

• You have a passion and love for what you'll be doing, and strongly believe --
based on educated study and investigation -- that your product or service would fulfill
a real need in the marketplace.
• You are physically fit and possess the needed mental stamina to withstand
potential challenges. Often overlooked, less-than-robust health has been responsible
for more than a few bankruptcies.
• You have drive, determination, patience and a positive attitude. When others
throw in the towel, you are more determined than ever.
• Failures don't defeat you. You learn from your mistakes, and use these lessons
to succeed the next time around. Head, SBA economist, noted that studies of
successful business owners showed they attributed much of their success to
"building on earlier failures;" on using failures as a "learning process."
• You thrive on independence, and are skilled at taking charge when a creative or
intelligent solution is needed. This is especially important when under strict time
constraints.
• You like -- if not love -- your fellow man, and show this in your honesty, integrity,
and interactions with others. You get along with and can deal with all different types
of individuals.

2. Poor Management
Many a report on business failures cites poor management as the number one reason
for failure. New business owners frequently lack relevant business and management
expertise in areas such as finance, purchasing, selling, production, and hiring and
managing employees. Unless they recognize what they don't do well, and seek help,

5
business owners may soon face disaster. They must also be educated and alert to
fraud, and put into place measures to avoid it.

Neglect of a business can also be its downfall. Care must be taken to regularly study,
organize, plan and control all activities of its operations. This includes the continuing
study of market research and customer data, an area which may be more prone to
disregard once a business has been established.

A successful manager is also a good leader who creates a work climate that
encourages productivity. He or she has a skill at hiring competent people, training them
and is able to delegate. A good leader is also skilled at strategic thinking, able to make
a vision a reality, and able to confront change, make transitions, and envision new
possibilities for the future.

3. Insufficient Capital
A common fatal mistake for many failed businesses is having insufficient operating
funds. Business owners underestimate how much money is needed and they are forced
to close before they even have had a fair chance to succeed. They also may have an
unrealistic expectation of incoming revenues from sales.

It is imperative to ascertain how much money your business will require; not only the
costs of starting, but the costs of staying in business. It is important to take into
consideration that many businesses take a year or two to get going. This means you will
need enough funds to cover all costs until sales can eventually pay for these costs.

4. Location, Location, Location

Your college professor was right -- location is critical to the success of your business.
Whereas a good location may enable a struggling business to ultimately survive and
thrive, a bad location could spell disaster to even the best-managed enterprise.

Some factors to consider:

• Where your customers are

• Traffic, accessibility, parking and lighting
• Location of competitors
• Condition and safety of building
• Local incentive programs for business start-ups in specific targeted areas
• The history, community flavor and receptiveness to a new business at a
prospective site

6
5. Lack of Planning
Anyone who has ever been in charge of a successful major event knows that were it not
for their careful, methodical, strategic planning -- and hard work -- success would not
have followed. The same could be said of most business successes.

It is critical for all businesses to have a business plan. Many small businesses fail
because of fundamental shortcomings in their business planning. It must be realistic
and based on accurate, current information and educated projections for the future.

Components may include:

• Description of the business, vision, goals, and keys to success

• Work force needs
• Potential problems and solutions
• Financial: capital equipment and supply list, balance sheet, income statement
and cash flow analysis, sales and expense forecast
• Analysis of competition
• Marketing, advertising and promotional activities
• Budgeting and managing company growth

In addition, most bankers request a business plan if you are seeking to secure addition
capital for your company.

6. Overexpansion
A leading cause of business failure, overexpansion often happens when business
owners confuse success with how fast they can expand their business. A focus on slow
and steady growth is optimum. Many a bankruptcy has been caused by rapidly
expanding companies.

At the same time, you do not want to repress growth. Once you have an established
solid customer base and a good cash flow, let your success help you set the right
measured pace. Some indications that an expansion may be warranted include the
inability to fill customer needs in a timely basis, and employees having difficulty keeping
up with production demands.

If expansion is warranted after careful review, research and analysis, identify what and
who you need to add in order for your business to grow. Then with the right systems
and people in place, you can focus on the growth of your business, not on doing
everything in it yourself.

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7. No Website
Simply put, if you have a business today, you need a website. Period.

In the U.S. alone, the number of internet users (about 70 percent of the population) and
e-commerce sales (about 70 billion in 2004, according to the Census Bureau) continue
to rise and are expected to increase with each passing year. In 2004, the U.S. led the
world in internet usage.

At the very least, every business should have a professional looking and well-designed
website that enables users to easily find out about their business and how to avail
themselves of their products and services. Later, additional ways to generate revenue
on the website can be added; i.e., selling ad space, drop-shipping products, or
recommending affiliate products.

Remember, if you don't have a website, you'll most likely be losing business to those
that do. And make sure that website makes your business look good, not bad -- you
want to increase revenues, not decrease them.

When it comes to the success of any new business, you -- the business owner -- are
ultimately the "secret" to your success. For many successful business owners, failure
was never an option. Armed with drive, determination, and a positive mindset, these
individuals view any setback as only an opportunity to learn and grow. Most self-made
millionaires possess average intelligence. What sets them apart is their openness to
new knowledge and their willingness to learn whatever it takes to succeed.

Copyright 2006, Attard Communications, Inc.

About the author:

Patricia Schaefer is a staff writer for Business Know-How. She can be reached by email
at pschaefer@businessknowhow.com

http://www.businessknowhow.com/startup/business-failure.htm

The 6 Untold Reasons Why Businesses Fail

Written by Dave Lavinsky
Categories:

• Dave Lavinsky
• Entrepreneurship

8
There have been many articles written on the subject of why businesses fail,
and most of them point to the same reasons, such as:

-Inadequate funding
-Bad location
-Lack of a well thought-out business plan
-Poor execution
-Bad management
-Expanding too quickly
-Insufficient marketing or promotion
-Inability to adapt to a changing marketplace
-Failure to keep overhead costs low
-Underestimating competitors

These reasons are widespread and no doubt cause many businesses to fail.
However, the reason for a company’s failure is not always something so
obvious. Here are 6 lesser-known reasons why a business might fail.

Why do these reasons remain untold? Simple. Most of the time, the business
owner doesn’t realize that these reasons are what caused their failure, and
consultants generally don’t ask the kinds of questions that would identify
them.

1) Focusing on Short-Term Profits Rather than Building Long-Term

Value

It’s important to be profitable, but NOT when short-term profits come at the
expense of the long-term value of the business and the lifetime value of the
customer.

Here’s a real-life example: In the late 1990s, there was a franchise of a

national smoothie shop located in West Los Angeles, CA. At this store,
smoothies sold for about $4. They cost only around $1 to make, resulting in a
solid profit. However, certain ingredients, like mangoes and berries, cost
more than the other ingredients, such as juice and frozen yogurt. Since juice
and frozen yogurt were cheap, the franchisee put more of these ingredients
in their smoothies and less of the expensive ingredients. By doing this, their
profit margin per smoothie grew by approximately 20 cents, which seemed
great… on paper. Unfortunately for the store, customers weren’t satisfied
with the taste of the lower cost smoothies, people stopped going there, and
the store eventually went out of business.

9
As you can see here, it’s important to consider the lifetime value of a
customer. Repeat business is way more valuable than short-term profits.
Saving 20 cents on a smoothie today will cost you big in the long run.

(Another great example of this concept is Google giving preference to

relevant ads in order to improve the user experience, even though there are
less relevant advertisers willing to pay a higher price per click.)

2) Ego Business vs. Business Opportunity

The foundation of a good business is a good business opportunity. As an

entrepreneur, you want to fill a need in the marketplace. Unfortunately,
many businesses are started solely to fulfill an entrepreneur’s ego (or, to put
it less harshly, to satisfy one of the entrepreneur’s interests).

This can often be seen in the restaurant & bar industry, where too many
entrepreneurs open shop because it’s a “cool” thing to do. Such businesses
rarely succeed.

3) Life distractions

The best ideas don’t always come between 9 and 5. A person might have a
great idea while driving, or in the shower, or while working out. It’s moments
like these when an entrepreneur leaves behind the day-to-day tasks of
running a business and gains a better perspective of the big picture.

Sadly, there are a lot of things that can disrupt a person’s home life. Illness,
death of a family member, divorce, relationship trouble, and problems with a
child are just a few of the many issues that can affect a person’s mindset.
When things like this occur, moments of clarity are replaced by stress and
anxiety.

Many entrepreneurial ventures depend heavily on new ideas and creative

thinking, and when an entrepreneur’s head isn’t clear, business can suffer.

4) Bad feedback & white lies

People like spending time with friends and family.

Unfortunately, when it comes to business, friends and family members don’t

always give the best advice. This is especially true at the birth of a business.

10
Nobody wants to be a buzz-kill. No one wants to tell an entrepreneur their
idea is bad, or their location stinks, or anything else negative. Most people
are conditioned to be supportive of their friends and family regardless of the
situation.

Plus, nobody wants to be wrong. Imagine your friend has an idea that you
think is terrible. You share your objections, but the friend goes ahead with
the idea anyways, and it succeeds. Now you’ll always be the naysayer that
never believed in them. Nobody wants to be that person.

That’s why you’ll rarely get honest, objective business advice from friends or
family members. And yet, oftentimes friends and family are the first people
entrepreneurs turn to for advice.

5) Maybe the owner is just a jerk

There are a lot of great people in the business world, but there are also some
jerks. And these jerks sometimes start their own companies.

A jerk, in this case, is someone who a lot of people can’t get along with.
Maybe it’s because they’re a super-perfectionist, or they yell a lot, or they
demand that everything be done in a certain way, or they constantly
complain. Or maybe they’re annoying in some other way.

The key is that nobody -- not employees, customers, partners, suppliers,

clients, etc. -- wants to give 100% for a jerk. Clients and customers will be
turned off, and employees will start cutting corners. Most people believe that
life is too short, and don’t want to spend their time working with someone
they can’t get along with.

6) The entrepreneur never took the full leap

In most new business attempts, the entrepreneur never leaves their day job,
or they create a back-up plan, or they have a job lined up in case the new
business fails. In these cases, failure IS an option, as the entrepreneur has a
safety net to fall back on. In cases where failure is NOT an option, and the
entrepreneur depends on the new business to provide food, shelter and
clothing, the business has a greater chance of succeeding.

There’s a great example of this concept in this recent NY Times article. Xiang
Yu was a third century (B.C.) General in the Chinese army. He led his troops

11
into enemy territory by crossing the Yangtze River. Then, in order to inspire
his troops, Xiang Yu took some unorthodox measures. He burned all of his
troop’s ships and destroyed all of their cooking materials. This left the troops
with only two options: Move forward and conquer the enemy, or perish. The
maneuver did not make Xiang Yu very popular with his soldiers;
nevertheless, the troops advanced and ultimately emerged victorious.

Xiang Yu’s methods might be a little drastic in this day and age, but the
moral of the story is what’s important. Author Anita Roddick has said that
entrepreneurship is a matter of survival, and the truth is, if you’re not totally
committed to your business, your chances for success will be greatly
diminished.

About Growthink

Since 1999, Growthink's professional business plan writers have assisted

more than 1,500 clients in launching and growing their businesses, and
raising more than $1 billion in growth financing.

• Want to ensure that your business succeeds?

• Need help with your business plan?
• Looking to raise venture capital?

http://www.growthink.com/content/6-untold-reasons-why-
businesses-fail

Why Do Many Small Businesses Fail?

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Small Business

According to the Small Business Administration, two-thirds of new businesses

survive for at least two years, and only 44 percent survive at least four years. Why
some businesses fail and why some succeed is a matter of debate, although there
are some common mistakes that can sink a business in no time.

Give your new business venture a fighting chance by taking care to avoid these
fatal errors:

Overexpansion. Wanting to be the first to market with a new product, taking on

added overhead, and the need to demonstrate revenue growth to anxious investors
can all induce businesses to overextend themselves financially. Rather than head
down this path, start with realistic goals and allow yourself to grow as needs
dictate. Let your revenue, not pie-in-the-sky projections, dictate your hiring
practices.

Poor capital structure. Look at the businesses that fail and you'll find that many of
them took on too much debt. Learn to pay strict attention to your finances and keep
careful records of all money coming in and going out. Even if everything's coming
up roses today, trouble can still be right around the corner.

Overspending. Many startups spend their seed money before cash has begun to
flow in at a positive rate. This often happens because of misconception about how
business operates. If you're just starting out in business, seek out seasoned
veterans you can bounce your ideas off of prior to making big financial
commitments.

Lack of reserve funds. Failing to prepare for volatile markets and uncontrollable
costs like energy-rate increases, materials, labor, natural disasters, and the like is
another top reason many businesses fail. Make sure you protect your investment
and keep enough reserve cash to carry you through market downtrends and
seasonal slowness.

Bad business location. Don't let a cheap lease tempt you into opening your doors in
the wrong neighborhood if your gut is telling you it's not right. Key factors to
consider include competition (how many other similar businesses are located
nearby?) and accessibility (is the area well served by freeways, public
transportation, and foot traffic?).

Poor execution and internal controls. Poor customer service, accounting controls,
and overall employee incompetence can all combine to bring down the ship. Make
sure you and your employees place a premium on customer service to generate
repeat business, establish protocols for how tasks should be accomplished, and
remain continually in the know on all things accounting.

13
An inadequate business plan. Your business plan is your blueprint for success. A
well-thought-out business plan forces you to think about the future and the
challenges you'll face. It also forces you to consider your financial needs, your
marketing and management plans, your competition, and your overall strategy for
coming out on top.

Failure to change with the times. The only constant in business is change. Once
mighty behemoths fall to earth while unknown upstarts rise to prominence. The
ability to recognize opportunities and be flexible enough to adapt to changing times
is a key ingredient to surviving and even prospering in the toughest business
climate. Therefore, learn how to wear multiple hats and to generate new interests
and areas of expertise.

Ineffective marketing and self-promotion. Customers can't walk through your front
door if they don't know you're there. Learn how to cost-effectively advertise and
promote your business through such tried-and-true methods as direct mail, ads in
local newspapers, Web sites, blogs, even by sponsoring a local little league team.
The number of advertising and promotional ideas that exist is only limited by your
own creativity.

Underestimating the competition. Consumer loyalty doesn't just happen; you have
to earn it. If you don't take care of your customers, your competition will. Watch
your competition as closely as you do your own employees.

http://www.allbusiness.com/business-planning-structures/business-
plans/1440-1.html

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Business Failure

Why Businesses Fail

Why do businesses fail? Ironically, the main reason is that the business owners didn't take the
time to learn why most businesses fail before they ventured into starting a new business. Here
are common pitfalls that can lead to business failure. Your mission? Understand them and
avoid them!

Small businesses fail at an alarming rate in the U.S. Every day, hundreds of small businesses
close their doors because they weren't able to effectively blend the many elements needed for
success.
(article continues below)

Unfortunately, many of these businesses could have succeeded if they had

only known how to avoid the top six pitfalls that commonly plague struggling
companies.

1. Lack of planning

Successful small businesses

don't just happen. They are the result of intentional and well-executed
business plans
. Many entrepreneurs are so eager to get started that they neglect business
planning and jump in headfirst with little more than a dream and an idea.
That might cut it in some arenas, but not in small business. If you have
already started your business and don't have a business plan, your first
priority should be to get one. Fast!

2. Inadequate funding

Another common reason for small business failure is a lack of adequate

funding, especially during the critical start-up period. Inadequate funding
severely limits your capacity and threatens your ability to grow beyond the
initial stage of life. If you have done your homework properly, you should
know how much money it will take to launch your business. Resist the urge

15
to start until you have obtained all of the funding you know you need to do it
right.

3. Bad marketing

It's possible to create a business that sells the best product at the best price
and still fail because no one knows it exists. Getting the word out about your
product is critical if your business is going to have any chance of becoming
the thriving venture you think it can be. If you don't know anything about
marketing, get help from someone who does. If all else fails, cruise the local
bookstore and pick up a few resources that will help you get started.

4. Unreliable suppliers

You can't sell what you don't have. Your ability to maintain proper levels of
inventory is directly proportional to the quality of your relationships with
reliable suppliers. Developing effective supply channels can take a little time,
but if you are having problems with your current supplier don't cross fingers
and hope things will get better. Take action! Seek out new supplier
relationships and make the switch as quickly as possible.

5. Staffing imbalances

Labor is the biggest expense for most small businesses. Therefore, it only
makes sense that it's worth your time to make sure that your company
employs the right amount of people. Too many employees and you'll be
forced to carry around dead weight. Too few employees and performance
will suffer. Striking the perfect balance isn't easy, but the rewards are well
worth the effort.

6. Ineffective sales performance

Sales are a key element in the success of any businesses. Poor sales, on the
other hand, are an indication that your business might be in jeopardy.
Maintain a close eye on sales patterns and trends, and hire the best sales
staff you can afford to keep the money rolling in and your company rolling
on to the next level.

http://www.gaebler.com/Why-Businesses-Fail.htm

Why Small Businesses Fail: SBA

16
The U.S. Small Business Administration has seen lots of small businesses
come and, unfortunately, go. According to the SBA, over 50% of small
businesses fail in the first five years. Why? What goes wrong?

In his book Small Business Management, Michael Ames gives the following
reasons for small business failure:

1. Lack of experience

2. Insufficient capital (money)

3. Poor location

4. Poor inventory management

5. Over-investment in fixed assets

6. Poor credit arrangements

7. Personal use of business funds

8. Unexpected growth

Gustav Berle adds two more reasons in The Do It Yourself Business Book:

9. Competition

10. Low sales

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.

On the Upside

It's true that there are many reasons not to start your own business. But for
the right person, the advantages of business ownership far outweigh the
risks.

17
You will be your own boss. Hard work and long hours directly benefit you,
rather than increasing profits for someone else. Earning and growth potential
are far greater. A new venture is as exciting as it is risky. Running a
business provides endless challenge and opportunities for learning.

For more information on assessing your readiness, see: Are You Ready for a
Small Business? Source: U.S. Small Business Administration
http://usgovinfo.about.com/od/smallbusiness/a/whybusfail.htm

Why Businesses Fail

Posted on August 30th, 2010 by admin in Leadership, Operations &

Strategy

By Mike Myatt, Chief Strategy Officer, N2growth

Why do business fail? Given the current state of the economy, I would say it’s a safe bet that
many of you have pondered the answer to this question as we watch companies close their doors
on a daily basis. The unfortunate reality is that well more than 50% of all new business ventures
fail within the first three years, and especially during tough economic times, many mature, even
once category dominant companies fail over time. In today’s post I’ll share my thoughts as to the
real number one reason why businesses fail – It’s not what you think…

I don’t believe there’s too much debate among “the experts” that the most frequently cited cause
of business failure is a lack of capital. While the recent events on Wall St might lead you to
believe it’s true, capital while clearly a nice luxury, doesn’t make it a necessity (here I go picking
on “the experts” again). You see, I have witnessed well capitalized ventures fail miserably, and
severely under-capitalized ventures eventually grow into category dominant brands. A lack of
capital can provide a socially acceptable excuse for business failure, but it is not the reason
businesses fail.

While it may be every entrepreneur’s fantasy to launch their business with 5 years operating
reserves in the bank, the reality is that this very rarely happens. Additionally, it is not really the
amount of capital a venture secures, but rather the relationship between the amount of capital
raised and identified capital requirements that matters. As we’ve all observed in recent months,
the real issue is not how much capital you have, but how effectively the capital is deployed and
managed that makes the difference.

I would go so far as to say that well capitalized start-ups may have a higher mortality rate than
their thinly capitalized counterparts. When capital is a scarce commodity, each spending or
investment decision tends to be made with great care. A lack of capital forces entrepreneurs to
prioritize their decisions, and to focus their efforts on high impact areas. Conversely, well
capitalized ventures often make ill-advised decisions and frivolous expenditures that result in
lower margins and increased commitments to overhead creating unnecessary operational burdens
on the enterprise.

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The reality is that you can ask 10 different people why businesses fail, and you’ll likely receive
10 different answers. While each answer could well be a contributing factor to the demise of a
business venture, there is in my opinion one singular cause for all business failures…a lack of
sound leadership. When I refer to leadership in today’s context, I’m pointing specifically to
executive leadership as represented by the entrepreneur or CEO. In the 10 points listed below I’ll
examine some of the more common reasons attributed to business failure, and I’ll likewise
assess the roles and responsibilities of leadership as they pertain to the following reasons:

1. Lack of Vision: It is the role of the CEO to clearly define and communicate the corporate
vision. If there is no vision, a flawed vision, or a poorly communicated vision, the
responsibility falls squarely in the lap of executive leadership. Moreover, if the vision is
not in alignment with the corporate values there will also be troubled waters ahead. No
vision equals no leadership…
2. Lack of Execution: Everything boils down to execution, and insuring a certainty of
execution is job number one for executive leadership. If as an entrepreneur or CEO you
don’t focus on deploying the necessary talent and resources to insure that the largest risks
are adequately managed, or that the biggest opportunities are exploited, then you have a
leadership team destined for failure.
3. Lack of Capital: Raising, deploying, and managing capital is ultimately the
responsibility of leadership. The amount of capital required to run a business is based
upon how the business is operated. Therefore if leadership operates the business without
consideration for capital constraints, or irrespective of capital formation issues, then the
blame should fall squarely on the shoulders of leadership. Morever, if executive
leadership squanders capital through irresponsible acts, there will also be severe
consequences.
4. Lack of Management: It is the job of leadership to recruit, mentor, deploy, and retain
management talent. If the management team is not getting the job done, it’s not a
management problem, it’s the fault of executive leadership.
5. Lack of Sales: A lack of sales is ultimately attributable to a lack of leadership. Strategy,
pricing, positioning, branding, distribution, compensation, or any number of other metrics
tied to sales force productivity all rest with executive leadership.
6. No Market: Good leadership pursues sound market opportunities. Pursuing the wrong
market, or pursuing the right market improperly is also the fault of executive leadership.
7. Poor Professional Advice: Nobody has cornered the market on knowledge and wisdom.
If leadership doesn’t seek out the best quality advice available to them, then they will
likely not make the best decisions. All CEOs and entrepreneurs need top quality
professional advisers.
8. The Inability to Attract and Retain Talent: Great leaders surround themselves with
great talent. They understand that talent begets more talent. If your company doesn’t
possess the talent it needs to achieve its business objectives no one is to blame but
leadership.
9. Competitive Awareness: A business does not need to be the category dominant player to
avoid failure. That being said, it is the leadership’s responsibility to understand the
competitive landscape and navigate it successfully.
10. Obsolescence or Market Changes: If executive leadership is in touch with the market it
will be difficult to be caught by surprise. It is the responsibility of executive leadership to

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 make sure that the proper attention is given to innovation, business intelligence and
market research to manage the risk of obsolescence and market changes.

Bottom line…businesses don’t fail – leaders do. The talent that it takes to operate at the C-suite
level is matched only by the amount of responsibility that goes with the territory. If it was an
easy job everyone would be a CEO or entrepreneur. Please share your thoughts in the comments
below…

http://www.n2growth.com/blog/why-businesses-fail/

25 Top Reasons Why Businesses Fail

Starting a business, whether it be from home, or in an office somewhere,

may sound like the perfect solution to your working blues, but unless you’re
committed to making it work, you can find yourself on the losing end real
quick.

Businesses fail for many reasons. It is important to understand those

reasons so that you can decide whether or not you are up to the challenge.
Those reasons include:

1. Fear—Whether it is the fear of success or the fear of failure, fear of

stepping out of one’s comfort zone to try something new, or the fear of trial
and error. Fear can freeze a person dead in his or her tracks.

2. Failure to plan.

3. Lack of funding.

4. Procrastination

5. Excuses. Especially making an excuse for any and everything that causes
you to stumble.

6. Doing busy work. Keeping busy doing unimportant tasks.

7. Inability to delegate tasks. Sometimes delegation saves your business. If

you have a weakness, hire someone who could turn that weakness into a
strength. Use others to complete simple time consuming tasks so that you
can do other things.

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8. Failure to Research.

9. Failure to Market.

10. An inconsistent advertising campaign. It is better to have a ton of small

ads on a regular basis than one large ad on a monthly or yearly basis.

11. Your pricing is too low, thus resulting in a negative cash flow.

12. Bad accounting practices.

13. Choosing quantity over quality. Cutting corners is bad business sense.

14. Dishonesty.

15. Not fixing mistakes.

16. Not completing tasks in a timely manner.

17. Inability to follow-up. You should always follow-up by email, snail mail, or
phone.

18. Not listening to client or customer. Talking too much.

19. Spending too little. It takes money to make money.

20. Spending too much. Purchasing items when you don’t need them,
upgrading when the older version will do, letting suppliers talk you into
things you cannot afford, and not budgeting.

21. Being unprepared for fluctuations in business. Boom times when

demands are high as well as slow times when you are struggling to get by.
(Put money away during boom times to prepare for slow times.)

22. Lack of diversification. If you only offer one product or service, losing it
can destroy your business.

23. Reputation. While a good reputation will gain you tons of business, a bad
reputation could close your business.

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24. Cockiness. There is nothing wrong with feeling great about your
products, services, or accomplishments. Just don’t let pride and arrogance
destroy your customer relations.

25. Discouragement. Giving in to your feelings of discouragement, when

things do not work out the way you planned or succeed as fast as you
thought. Also allowing others to feed on any discouragement you may
already feel.

http://www.internetbasedmoms.com/internet-marketing/why-
business-fail.html

Why Businesses Fail

Posted by Ken Sundheim, on October 11th, 2010

To be able to start a business from thin air is quite a hard thing to do. Some can, some cannot.
There are a lot of variables when it comes to a business succeeding or failing. Below, you will
find a list containing the reasons as to why some small businesses fail and what you, the business
owner can do to prevent the situations from becoming a problem in the first place.

No Leadership, Employees Get Lazy and Sometimes Insubordinate

As a manager, you should never “manage,” unless it comes to a dire situation. Power trips for
unintelligent, insecure managers and business owners. Instead, you should be friendly, listen to
the ideas the employees have as well as consider them the front line soldiers who know what is
going on in the market.

However, some newer, younger employees may see this type lax of attitude and attempt to
leverage it in an attempt to firmly establish a “do what I want whenever I want” mentality and
atmosphere throughout your company. This can spread like wildfire and it can get out of control
very quickly. Upon the first sign that the employees are slacking and not taking their jobs
seriously, the manager or business owner must remind them as to why they are paying them the
amount that they are being compensated and reiterate as to what kind of productivity and
execution is expected.

Good managers and /or business owners lead by example and create a business atmosphere that
screams “hard work” and “company dedication.” You must create a “produce or don’t work here
atmosphere” within the organization or your business is being left often to failure.

Not Paying the Employees Enough

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To obtain the best employees, one must pay. Your employees are going to be representing your
company every time a potential client calls or very time somebody visits the office. These
individuals are going to be the face of your creation. Regardless of how impressive you may be,
if your employees are not sharp and don’t give off an energetic vibe, clients are going to begin
shying away and will not take you nor your company seriously.

Additionally, if you are not ready to pay an employee or employees a salary that is very industry
competitive, you must do the extra work and continue to put in the 16hour days until you can
provide a salary that is conducive to acquiring top notch talent.

Don’t misunderstand. This does not mean that you have to save $200,000 for the person, but
look at various job boards. What are your competitors paying to bring in new employees? Do
you think that they are getting impressive or lackluster talent offering the compensation packages
that they are? Always aim higher.

If they are paying them $70,000 a year, budget $85,000. You always want to get employees who
are better than the workers whom your opposing firm currently has.

Business owners with big egos don’t bring in high returns. Don’t just have an employee simply
to say you have one. There is no sense in doing this. I know people who have done this and it
gets them absolutely nowhere.

Lastly, free employees can quickly bring down a corporate empire. They can bring down the
corporate empire that you a very long time to create and bring to life. I’ve always felt that simply
having the thought of obtaining free employees is a little off. Why should somebody work for
you for free? Would you work for somebody else for free?

I can see justification that they would do so if you were sharing half of the company revenues
with them a.k.a. making them a partner. Otherwise, those employees are going to leave and,
upon them going to competitors, they may badmouth you. Therefore a result of you even
attempting to obtain free labor, will give your competition free and very useful competitive
intelligence on your company. Their obtainment of this information could come from a job
posting or your former “gratis” employees potentially bad-mouthing you.

Ken Sundheim is the founder of KAS Placement Executive Staffing, which is a 5-year-old
company with nearly 10 employees and growing at a very rapid pace. Read more about Ken
here.

http://www.youngentrepreneur.com/blog/why-businesses-fail/

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10 Steps to Starting a Business
Starting a business involves making key financial decisions and completing a series of legal
activities. This guide provides information to help you plan, prepare, and manage your business.

1. Step 1:

Research and Plan Your Business

Use these tools and resources to help you prepare your business plan and become a
successful business owner.

2. Step 2:

Get Business Assistance and Training

Take advantage of free training and counseling services, from preparing a business plan
to getting financing, and help expanding and relocating a business.

3. Step 3:

Choose a Business Location

Get advice about choosing a customer-friendly location and complying with zoning laws.

4. Step 4:

Finance Your Business

Find government backed loans, venture capital and research grants to help you get
started.

5. Step 5:

Determine the Legal Structure of Your Business

Decide whether you are going to form a sole proprietorship, partnership, LLC,
corporation, non-profit or cooperative.

6. Step 6:

Register a Business Name ("Doing Business As")

Register your business name with your state government.

7. Step 7:

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 Get a Tax Identification Number
Learn which tax identification number you'll need to obtain from the IRS and your state
revenue agency.

8. Step 8:

Register for State and Local Taxes

Register with your state to obtain a tax identification number, workers' compensation,
unemployment and disability insurance.

9. Step 9:

Obtain Business Licenses and Permits

Get a list of federal, state and local licenses and permits required for your business.

10. Step 10:

Employer Responsibilities
Learn the legal steps you need to take to hire employees.

http://www.business.gov/start/start-a-business.html

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