Having been a small business owner and consultant for twenty-plus years, I had the opportunity to learn from my own mistakes, as well as, seeing the business failings of others. I have learned that there are definitely reasons why a small business fails; why some are successful; and why certain types of people are more successful business owners and entrepreneurs. The good news is most successful small business owners had many failings before achieving a level of success, and the object of this article is to identify their (and my) mistakes.
When starting a business, an entrepreneur needs to first bring sufficient cash to the venture. I recommend a minimum 10% of the total funding amount to come from Owner’s Equity, with 20% being optimum. Having a strong equity stake in the beginning of a Company’s life makes acquiring the additional capital much easier and less expensive.
Strong Owner’s Equity shouldn’t stop after a Company’s start up stage. A Company’s strength in Retained Earnings is key to growing the Company, seizing on market opportunities and obtaining future finance. If you lack owner’s equity capital, there is additional undue pressure on a Company’s cash flows, making it increasingly hard to obtain the appropriate funding.
Successful entrepreneurs are typically well read. They are always striving for more knowledge and take advantage of the wealth of resources offered through business schools and, as importantly, read other successful entrepreneur’s books. A Business Degree or MBA is a helpful foundation but gaining knowledge from those who have found success is critically important to understanding why businesses fail, as well as, spawning new ideas and markets.
Inexperience ties in with Lack of Business Knowledge. Business Knowledge can be acquired in school, through books and magazines, and via experienced business owners. Business Experience is the critical and common link between successful entrepreneurs. Inexperience costs money when mistakes are made. Make too many mistakes, and you are out of business. Mistakes are a natural part of the business learning curve, however, minimizing them is very important to stay in business. I highly recommend going into a business which you have experience and passion while seeking out those who have been in the same business for a time and reached a significant level of success. Experience comes with time, but you can also learn from the mistakes others have made before you. Cultivate business relationships, mentoring opportunities and networking events and forums. I can’t tell you how many times spending time with an experienced entrepreneur has paid off in spades, in my business life in so much as, what not to do, as what to do.
This is a biggie. If you can’t effectively manage people, learn how to and / or hire someone who can. Some entrepreneurs are great at this vital skill and others don’t have the patience for it. However, the bottom line is you can have a great idea, product and market, but poor management will cause business failure 9 times out of 10. Poor management often evolves into poor employee morale and high employee turn-over, which significantly hampers a company’s ability to compete in the market. Management doesn’t just entail employee management but also the ability to manage the Company. Having a good Business Plan, excellent Profit Strategies, and effective Cash Flow Management are just some of the important management tools necessary to run a successful business. Businesses often fail because they haven’t owned up to and analyzed their weaknesses, which often stems from poor management practices.
The lack of a business plan or the poor implementation of a plan is typically the number one reason for business failure. So why do small businesses neglect to plan? Because it can be a very difficult process to do well; day to day business activities leave them little time to plan; they fear the weaknesses and problems’ planning reveals; they lack the knowledge on how to effectively plan; or they feel the future can’t be planned for.
However, to be successful in a small business by relying solely on luck is a huge gamble and often meets failure. You must know where you are going and how to get there. A good Business Plan guides the entrepreneur on how to operate a business; interest investors and bankers on financing the business; provide direction and motivation to employees; and establish an environment which will attract and retain customers and talented employees.
I have seen many instances where a business has a business plan, but it lacks the operational and control features to successfully implement it and the strategic know-how to successfully link the marketing plan with effective financial modeling and forecasting. Good planning is both Strategic, which is high-level, long range goal setting and meeting of objectives, and Operational, which implements the Strategic Plan, operates the business and sets the policies, methods and procedures to do so.
Planning actually means good business management. Inadequate planning often translates into poor management functions. It is a process which relates and inter-relates closely to Managerial Functions. Many business Owners don’t understand the extent of these vital relationships, thereby producing inadequate plans, which ultimately lead to business failure.