Business Success Strategies Article

Why Some Businesses Succeed and Other’s Fail

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 over this period 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 learn from their mistakes, as well as, take stock in what characteristics entrepreneurs have in common which enhance their chance at success.

Why Small Businesses Fail?

1) Lack of Capital

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. For more information go to Successful Business Funding and Finance Strategies.

2) Lack of Business Knowledge

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.

3) Inexperience

In experience ties in with #2, 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 due to mistakes. Make too many mistakes, and you are out of business. Mistakes are a natural part of the business learning curve; however, minimizing them is important to stay in business. I highly recommend going into a business which you have experience and passion in 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.

4) Poor Management:

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 Management 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.

5) Inadequate Planning

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 dowel; 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 management. Inadequate planning often translates into poor management functions. It is a process which relates and inter-relates closely to Managerial Functions. The following Flow Chart expresses this process and its relationships.

You can see from the Flow Chart that Planning is an inter-related, back and forth process. Many business Owners don’t understand the extent of these vital relationships, thereby producing inadequate plans, which ultimately lead to business failure.

Understanding the components of the Planning Flow Chart makes it much easier to develop and implement a good Plan:

• Planning:

• Organizational Objectives
• Establishing Programs, Policies & Strategies to achieve the Objectives

• Organizing:

• What Resources and Actions are needed to meet Organizational Objectives
• Setting up Working Groups
• Assigning authority and responsibility

• Staffing:

• Select, train, develop, place and orient employees
• Foster employee productivity

• Leading:

• Effective Communication & Motivation
• Performance
• Goal Achievement
• Work Assignments & Direction

• Controlling:

• Setting Standards
• Measuring Performance
• Corrective Action

The underlying reason why a small business fails often stems from poor Operational Planning. Operational Planning is critical, since it helps business owners and entrepreneurs avoid costly mistakes, saves considerable time over the long term, and successfully bridges the gap between planning on paper and implementing the plan. Three types of Planning, or Phases of planning, significantly improve a small business’s chance to achieve success:

• Pre-Start Operational Business Planning
• Ancillary Business Plans customized for Investors, Commercial Finance, Customers, Key Employees, Suppliers and the such
• Post-Start Continuous Planning & Control

The point I am trying to drive home here, and the reason why this section is much more detailed (and consequently more important) than the preceding ones, is Inadequate Planning stems from the fact that most small business owners fail to fully understand all of Planning’s parts and how to effectively harness and implement those parts into cohesive Operational and Strategic Plans, Goals and Objectives. I will explore what makes a Good Business Plan in a subsequent section, but the following ABC Business Consult Articles provide more detail on Effective Planning Strategies:

Effective Business Planning

Comprehensive Business Planning Guide & Workbook

Successful Strategic Plans

Small Business Recession Tactics

Characteristics of Successful Business Owners

There are certain qualities successful entrepreneurs’ shares in common. Some types of people are more suited than others to go into business for themselves, but I am a big believer that one who naturally doesn’t have the typical entrepreneurial characteristics doesn’t necessarily mean he or she won’t be a success. However, knowing these entrepreneurial commonalities can give you an idea for your propensity to be a successful business owner:

1. Desire Independence
2. Strong Sense of Initiative
3. Motivated to provide for family
4. Expectation of Quick & Concrete Results
5. Ready to act and react quickly
6. Very dedicated to business
7. Entered the business as much by chance as design

The Entrepreneur Test: Below are 20 personality traits to gauge your potential as an entrepreneur. On a scale of 0 to 7, with 7 the highest, rank each personality trait:

1. Ability to Communicate
2. Can Motivate Others
3. Organized
4. Accepts Responsibility
5. Can adapt to Change
6. Decision-Making Capability
7. Have Energy & Drive
8. In Good Health
9. Good Human Relations Skills
10. Have Initiative
11. People Person
12. Good Judgment
13. Open-minded
14. Planning Ability
15. Persistent
16. Resourceful
17. Self-Confident
18. Self-Starter
19. Good Listener
20. Risk Taker

Scale:

• 110-140 Very Strong
• 85-109 Strong
• 55-84 Fair
• 54 and below Weak

As an entrepreneur myself, I tend to be on the strong side of these traits. But not every successful business owner is strong in every one of these areas. This is why successful entrepreneurs’ recruit those who are strong in the areas they may be weak. If you are a hard worker and have the drive to be on your own, then over time you can develop and work on improving these useful skills. See our article on CEO Leadership Skills for more details.

We have discussed reasons why businesses fail and what are the common traits of successful small business owners. Wouldn’t it be nice to know some of the reasons why certain small businesses are successful? It is important to know what not to do as it minimizes mistakes, but by being proactive and knowing what to do can significantly increase your chances of success.

What Leads to a Successful Small Business?

1) A Good Business Plan

Going off what I said in the first section about business failure due to inadequate planning, it is absolutely essential to have a good Business Plan and planning within your business. What’s the distinction? You can develop a good business plan, but if you don’t implement it and make it a part of the fabric of your business, then its usefulness is minimal. However, to develop an effective Plan, you need to have a good business planning system to employ, and it is often very helpful to work with an Experienced Business Consultant in its design, development and implementation. For a Comprehensive Business Planning Guide and Process, please consider ABC Business Consulting’s Business Planning Guide and Workbook.

2) An Adequate, Well Defined Market

Market Research is critical as it gives your planning a dimension of predictable results. It links your Product Development with your Strategic Plan. For more information on developing an Effective Marketing Plan, please see our article on Market Analysis & Planning.

3) Understand Industry & Market Trends

Understanding both of where your industry and market are heading is important to staying competitive and continuing to meet your customer’s needs. Never assume you have captured your market and can sit on your laurels. Install Marketing Systems in your business to be continually analyzing and predicting customer and market behaviors and needs. Having consistent contact with your customers can help you produce better products, offer better suited services and grow along with your trending market.

4) Obtaining & Using Accurate Information

Accuracy in planning market trends and business growth must be reliant on information that is accurate and realistic. Then taking that accurate information and applying it to your present and future business capabilities is an important process. You must be realistic as to whether you can effectively exploit the potential of the information with your given human, operational and financial resources.

5) A Good Capital Acquisition Strategy

As discussed in the first section, it is important to come into a business with a strong equity position. You can then leverage off that cash strength with competitive, appropriate financing. A cohesive Financial Strategy, and implementation of it, is vitally important to a business’s success. A business needs not just adequate capital, but the right type of capital for the business, its goals and objectives. Please refer to ABC Business Consulting’s article on Analyzing Business Funding Sources & Strategies for more assistance in developing and implementing a Successful Financial Strategy for your business.

6) Effective Recruiting & Strong Human Resources

Going into business with the right people and subsequently recruiting and retaining good people is vital for a business’s success. Often a talented, experienced, highly-skilled employee will save you money in the long run and be very effective in a crisis; as compared to, scrimping on your labor costs, having to constantly train new people, relying on more people to get the job done and experiencing high-turnover and low employee morale. Please see our articles on Small Business Recession Tactics and Compensation Planning for more help on hiring and retaining the right talent for your Company.

7) Expertise & Experience

From the Company’s Founders and Principals all the way to the employees in the field, a high level of experience and expertise is necessary to effectively compete in today’s markets. The most successful entrepreneurs, bar none, are those that surround themselves not just with talent, expertise and experience, but have people on their team which fill the gaps in their personal experience base. We are only as smart and talented as those we surround ourselves with. Know your limitations and have the right people on board to fill the gaps.

8 ) Effectively Understanding the Implications of Government Regulation

Being surprised by changing regulations is not good. Keep yourself well educated on Government Regulatory Trends through good government relations and active membership in Industry and Business Associations. The efficacy of your product, service or market can change 360 degrees on the whims of government. So be involved and cognizant of this significant element.

9) Effective Time Management

A small business owner is pulled multiple directions at the same time all day long, every day. Your ability to multi-task is important; however, putting systems in place to effectively balance tasks and time is just as important. Delegation and planning are essential in effective time management. As pointed out previously, you must have good people around you to delegate responsibility, as well as, assisting you in managing your time as effectively as possible. Effective Time Management is a function of good planning as one comes with the other.

10) Hard Working & Long Hours

Last but certainly not least, Successful Business Owners must be willing to work very hard and spend many long days and weeks getting the job done for their customers. The Entrepreneur is often the first one to arrive early in the day and the one who leaves late in the day or night. Having a good Business Plan helps the successful business owner to work “smart”, but there is no way around good old fashioned hard work. You must be willing to put in the long hours to reap the benefits of self employment.

Concluding Advice

If you are contemplating starting a new business, do something you really love to do and have a passion for. The work is hard so you might as well enjoy it. Providing a great product or service to your customers is a worthwhile experience and should be something you really believe in. Passion is what carries you through the inevitable rough patches, no matter how well you plan and set up your Company. Small Business is simple: see a need and fill it. Working hard will be replaced with working smart as you build your Company over the years, gaining invaluable firsthand knowledge. You will find, though, as your Company matures, the real thrill for an Entrepreneur is the start-up phase, when you build something from scratch and do it successfully. Good luck in your endeavors.