Ready for some depressing statistics? Thirty percent of all new businesses fail in the first two years they are open, while half of all new businesses fail within the first five years of operation, and only one in three will make it to their tenth year in business (Source: Fundera). Those are grim numbers to anyone who is staking their future on their business endeavors. However, the news is not all bad. There are reasons that businesses fail, and knowing the danger areas is half the battle. Here are four of the critical failure points of small businesses, and some suggestions on how to not fall prey to them.
4 Small Business Fails to Avoid
1. Not Knowing Your Value Proposition
It’s become a cliche among business writers, but things often become cliches because they are true. Warren Buffett is perhaps the most famous exponent of this crucial concept: every successful business has a unique value proposition, something they do better or cheaper or more effectively than anybody else. One of the most common causes of business failure is a failure by management to understand their business’ value proposition, or even worse, a failure to have a value proposition at all.
Defining a value proposition is relatively easy; it’s making it a reality and living up to it that can be the real challenge for business owners. A value proposition that isn’t the truth isn’t going to help your business; that’s just a way to fool yourself with buzzwords. If your business doesn’t know its value proposition, you need to find it. This can be a very productive exploration. Involve your employees, your customers, and your stakeholders.
2. Incorrectly Correlating Cost with Revenue
Another axiom of successful businesses is that the revenue model should swamp the cost model. That is, the income generated by your business’ activity needs to exceed the costs generated by that activity, and then some. This may seem a little bit obvious but every year many businesses flounder because they simply don’t generate the revenue needed to keep the lights on. Either the founders of the business overestimated the demand for their product or service, or they underestimated how much it would cost to be in business.
A clear-minded analysis of your balance sheet is essential to understanding whether your business is in peril of having costs that outstrip revenue. It’s important to correctly correlate costs and revenue streams (which can be tricky) because misunderstanding your cost structure can lead you into bad decisions. For example, if your bakery employs a high-paid cake designer, the cost of his or her employment isn’t part of the cost equation for your line of generic bulk donuts, and the huge revenue stream from those donuts does not justify the employment of the cake designer, either. “Let’s hire another cake designer, look at all the money coming in” is only a rational decision if the cake-design portion of your business is the source of the income.
3. Not Being Change-Ready
The economic landscape is always changing. Some changes can be anticipated, but for the most part, many of them come by surprise. New technologies emerge, old understandings expire, public tastes are notoriously fickle, and recessions and booms come on their own schedule (they are not polite enough to give anyone advance warning). This, however, doesn’t mean you can’t be prepared for change to some degree. Having good levels of insurance coverage, keeping money in the bank, maintaining a flexible employee base—these and other measures can keep your business agile enough to handle changes that would otherwise be a threat to your success.
4. The Leadership Challenge
Surprises are inevitable, anyone can miscalculate a revenue stream, and misunderstanding the value proposition can be fatal—but to really take a business down, there’s nothing like bad leadership. This can be an ego-damaging line of thought, but business success doesn’t leave a lot of room for ego at the top. Is your leadership team doing their job? If they aren’t, the business isn’t going to survive. Whether that team is just you, or you plus the other managers of your company, you know where the buck stops.
Bad leadership is like ice cream: there is an almost infinite variety, a little bit probably won’t hurt much, but if it’s all you have, there will be disastrous consequences. Ten articles like this wouldn’t suffice to go into all the ways bad leadership can hurt a business, but there are a few basic ways to improve the leadership you provide:
- One, identify the things you’re not great at, and delegate those things to someone who is great at them. Nobody can do everything spectacularly well, and that includes leadership functions. If you’re great with people but bad at accounting, then add a number cruncher to your team.
- Two, get real feedback from your people. Your employees are the best resource for helping you to identify areas of improvement. Yet it’s also up to you to invite that kind of communication.
- Third, “as above, so below”. Your people are going to behave the way you behave. That’s just the nature of a hierarchical business structure. Model how you want your team to operate. They may not act worse than you do, but they will never act better.
Business failure isn’t a cheerful topic, but don’t let that stop you from working to prevent it. Communication, honest understanding of your business situation, and a realistic approach to future events can really help you deal with the inevitable stresses and challenges your business faces.