It’s a well known fact that the failure rate for small businesses is extremely high. We have heard the statistics, but what are the reasons? More importantly, what can small business owners do to avoid becoming one of those dreaded statistics? In this report, the statistics for business survival rates will be dissected. We will also discuss the top three reasons why businesses fail and provide recommendations for what you can do to turn your business around and become a long-term success.

Business Failure Statistics

Although small business failure rate is initially very high, the chance for small business success greatly increases after the five year mark. According to a report in the May 5, 2004 issue of USA Today, the failure rate of small businesses is as follows:

First year: 85%
Sixth: 47%
Second: 70%
Seventh: 44%
Third: 62%
Eighth: 41%
Fourth: 55%
Ninth: 38%
Fifth: 50%
Tenth: 35%

These statistics are, of course, reflective of small businesses in general. There is market and industry specific information available that can provide more detail for your particular business sector. Nonetheless, it can be deduced that no matter what industry you are in, there is a high failure rate, and generally speaking, the top three issues or reasons for small business failure are relatively consistent.

Top Three Reasons Why Small Businesses Fail

Almost every study or report indicates the main reason for small business failure is improper planning and expectations. When we dig deeper into these reports, there are three critical areas of planning that are often overlooked or underestimated:

1. Financial requirements to get the business started.
2. Generating/developing business and revenue.
3. Managing and controlling growth.

The small business owners who are able to figure out how to accomplish and overcome the challenges that accompany those three critical areas will typically enjoy a long, fruitful business life. The variable is figuring out how to do it. Most small business owners are very proficient at the product they supply or service they deliver. It is rare that a small business fails because the owner does not understand what they are doing. So how can businesses take the variable out of the equation to increase their chances for success? Let’s examine each reason in more detail.

Financial Requirements:

Misjudgment of the financial requirements of a business is the number one reason for small business failure. Why? Because sales are typically overestimated and expenses are typically underestimated. To properly estimate business expenses, here is a list of steps you can take to avoid this pitfall:

1. Seek advice from a small business accounting firm. These companies are in the business of evaluating expenses and will be able to help you accurately estimate your business expenditures.

2. Talk to other business owners and ask for advice. Even in different industries the initial headaches of starting a business are very similar. We recommend trying out the forum in the SalespreneurEDGE.com as a great resource to exchange ideas with other small business owners.

3. Utilize associations, i.e. local Chambers, Industry Associations, etc.

4. If you chose not to seek any advice and want to just do it on your own, list out every expense you think you will have and increase it by 50%. It is much better to overestimate expenses than to underestimate them.

5. Plan on hiring / outsourcing assistance, i.e., executive assistant, accountant, etc. One mistake that is often made is planning on doing everything yourself. It is easy to get caught up in activities that don’t produce revenue, so don’t let that happen to you. Stick with your core competency (your product or service) and outsource the rest. In the long run you will save dollars and many hours of revenue producing time. Once you have all of your costs determined for the first year, figure out how much revenue you need to generate to make a profit. Note that making a profit does not mean the same thing as earning enough to pay yourself. A profit is what is left after all expenses are paid, including your salary. If you don’t generate a profit there will be no capital available to grow your business, supplement in case of business slow down, or provide capital to invest in retirement.

Generating / Developing Business and Revenue:

When a new business is started it is an exciting time, and small business owners have a tendency to be overly optimistic in the area of generating sales. Many have the attitude, “Build it and they will come.” It takes a lot of effort to build up a consistent flow of incoming business. Unfortunately, it is not as easy as placing an ad or putting up a sign. Consumers typically want to purchase from other businesses they know and trust. This is why referral sales are so effective. There are a lot of strategies and processes a small business owner can incorporate to be successful at generating business and revenue.

Here are a few to get you started on the right path toward securing ongoing revenue streams:

1. Identify centers of influence. Look for “connectors” or fellow business owners that have an existing client base filled with people who would be ideal prospects for your business. Once you have identified those centers of influence, meet with them and develop a strategic alliance or referral program. You may not have a client base of your own to share, but you could offer other things, such as a low cost seminar that would add value to their existing clients. You would be surprised at the number of people who are both interested and willing to develop a strategic alliance. However, pick and choose these people carefully so you have access to potential customers.

2. Mine and cultivate existing clients. How often do you evaluate customers you have served in the past? Do you have a new product or service? Is it time for your customers to renew or upgrade? It is surprising how many people ignore their old customers and continually only focus on getting new customers. On average, between 25 and 50 percent of a small business’ database is full of opportunities. If you don’t get the business and service your customers, someone else eventually will.

3. Understand your customer’s needs and be solution oriented. The key to understanding a customer’s needs is to ask questions and find out what their problems are. Once you clearly understand the problems and how they are impacting them, i.e., loss of work, increased overhead, increased costs, etc., explain how your product or service provides a solution to their problem.

4. Have a strong and compelling reason why a customer should do business with you. Offering the best service and price are not strong enough reasons. Every competitor in your space will tout these as their reasons and you want to differentiate yourself from your competition. Additionally, today’s marketplace buyers and consumers are more educated than ever, and they need tangible reasons. Strong validators include a high ROI (return on investment), case studies with successful clients, customer testimonials, etc.

Another big topic in the world of sales is outsourcing. If you do decide to outsource your sales activities, realize it is an added expenditure and you are giving someone else the responsibility for interacting (during the sale) with your customers. Having the opportunity to interact with new customers is vital because initial impressions and ongoing customer interaction are necessary to building lasting customer relationships.

Managing and Controlling Growth:

The third most popular cause for small business failure is managing growth. When a business is in a growth or expansion mode, some get caught in a vicious cycle of replacing old customers with new customers. The scenario is that growing companies get so busy they cannot handle the increased workload, and disgruntled customers leave. When this happens you are canceling out any new business and working twice as hard, reaping little to no growth. Just as important is managing business during a downturn in the market. It is extremely important to rein in expenses and control growth; otherwise, the extra expenses and overhead will drain the life (cash flow) out of the company.

The best solution to address both of these situations is forecasting, understanding how much business is going to increase (or decrease) using a rolling three month cycle. A rolling three month cycle means that you forecast out for three months and update the forecast monthly. If you lack the experience or market knowledge to be able to forecast, simply track your sales. This will provide a history of your own business that will help determine trends. For example, accounting firms always get extremely busy from January through mid-April because it is tax season. During this period of time, many firms will hire part-time or temporary workers to handle the extra work load. They have learned that is not possible to carry so much overhead throughout the entire year, but they need the business surge in the first four months to earn a profit. Hiring temporary employees helps address this situation. Major department stores have the same process to handle the demands of holiday shoppers.

Your business may or may not have these seasonal surges and lulls, but the point is still the same: plan and prepare so you don’t miss out on the opportunity or end up carrying expenses that the business cannot afford.

Once you have identified your immediate cyclical needs, you should also create a plan for your growth. Take some time to write down your short term and long terms goals. Short terms goals would be those that you would like to meet within the current business year. Then, write down goals for growth for a three, five, seven and ten year outlook. Once you have these goals written down, create a plan to meet each of these goals. Make sure the following factors are addressed for each goal:

1. Customer to revenue ratio – make sure you can meet financial obligations of growth with the number of customers you need. You will also need to determine how much revenue you will need from each customer to reach this goal.

2. Short term financial needs – as you grow your business, whether it is by introducing a new product line, acquiring another business or adding more staff, you will have some short term capital needs. Determine how you are going to reach these needs. Can you solve them by increasing business or do you need a helping hand with some short term financing? If you need to go the route of financing, make sure you have a plan to pay it back. You want to avoid incurring ongoing debt if it is at all possible.

3. Spend wisely – if you have a good growth plan you will know when you will need extra cash flow and you can prepare for it. Take simple steps like not giving raises or bonuses during a time when you need cash flow. Make sure your inventory is stocked and your vendors are paid up to date. Rein in extras and decrease your operational burn for a short period and you will see how the extra cash flow can help fund your company’s growth.

Overall it is important to keep the big picture in mind. By tracking and planning for your growth it will be easy to see where you are going and not get lost in the day to day burdens of growing your business. It is easy for the small business owner to get overwhelmed and panicked about incurring debt and experiencing growing pains. Keeping your eye on the prize will allow you to systematically take steps toward controlled growth.

Summary:

Short of a bad product or service, small businesses have the opportunity to be extremely successful. Debunking the daunting statistics of the start-up small business reveals that it is imperative to educate yourself and plan for the future of your business. Taking the time to create a good marketing, sales and growth plan will allow you to have a road map for your success, a tool to measure your success and a history to refer back to for changes in strategy.

The trap that most small businesses fall into is getting caught up in day to day operations and forgetting that there always needs to be a strategic focus on what the business is doing in the three key areas for success: sales, marketing and growth. We have provided several strategies and solutions that address these three vital areas of growing a small business and hope that you will implement them for your own business. For more information on small business growth and sales strategies, visit our web site: http://www.salespreneuredge.com.


With over the 15 years of sales training and sales management experience, Henry Pellerin, SalespreneurEDGE™’s founder, realized there was a fundamental problem in the world of traditional sales training. So we took our sales training experience, in-house sales experience and developed useful processes that are flexible and can meet the specific objectives of our client organizations. Learn more here: http://www.salespreneurEDGE.com