Last week we discussed the importance of performing an autopsy on a dead business. No, I haven't been watching too many of those wonderfully graphic, TV forensic investigation shows. The reason I recommend you do a business autopsy is to uncover the exact reasons why the business died. This is valuable information that can not only heal feelings of personal failure, but also better prepare you for the pitfalls of business should you ever take the plunge again.
Starting a business is never easy and the odds of your success or failure are about even money. The fact is, approximately half of all small businesses fail within the first four years. And a large percentage of those failures occur within the first year. These are the statistics that keep many entrepreneurs awake at night. Like Sisyphus, always pushing that boulder to the top of the hill only to have it tumble back to the bottom each time, you never know when you're going to lose your grip on your business and have it tumble back over you.
OK, so far in this column I have managed to squeeze in references to modern American television and ancient Greek mythology. Enough highbrow beating around the bush. Perform the autopsy and learn from it. Only by knowing the real reasons your business died can you identify and hopefully stave off those maladies before they take you down next time, if there is a next time. And if you're a true entrepreneur there will be a next time, trust me on this.
There are many reasons why businesses fail, but according to a recent survey by U.S. Bank, the majority of business failures can be attributed to three reasons: bad management, bad financial planning, and bad marketing.
Bad management comes in many forms. The survey showed that seventy-eight percent of the business failures examined were due in part to the lack of a well-developed business plan and a business owner who had no business being in the business he was in. In other words, the business owner did not have an adequate knowledge or a thorough understanding of the business he had chosen to start. This is why software entrepreneurs like me don't start shoe stores. I have feet, I wear shoes. That's not enough to qualify me to go into the shoe business.
Next, seventy-three percent of the business failures in the survey were also manned by owners with rose colored calculators. These business owners over-estimated revenue projections (the number of expected sales) and under-estimated the burn rate (the amount of money required to sustain the business per month).
It gets better. Seventy percent of the failed businesses in the study were led by entrepreneurs who were in denial regarding their own competence, or more to the point, their own incompetence. These business owners either didn't recognize or chose to ignore their own entrepreneurial shortcomings. These entrepreneurs also did not seek assistance from others who might have made up for their inadequacies. It's sometimes hard to ask for help when you are supposed to be the one with all the answers.
Believe me, I know.
The final contributing factor to the death of sixty-three percent of the businesses who died from bad management was that the owners had no relevant or applicable business experience.
Bad financial planning was the second reason sited by the survey as to why most businesses fail. In business, it's always about money. According to the U.S. Bank study, eighty-two percent of the business failures studied reported poor cash flow management as a contributing factor to the death of the business.
Seventy-nine percent of the businesses were inadequately funded, and seventy-seven percent miscalculated the cost of doing business. In other words, they failed to take into account all of the costs involved when setting the price for their products.
Let's move on to my favorite subject: bad marketing. You've heard me preach this sermon before. You can have the greatest product in the world, but if your marketing efforts are inadequate or ineffective you will end up with a warehouse full of the greatest product that no one in the world has ever heard of.
The study showed that bad marketing was a contributing factor in the death of sixty-four percent of the businesses surveyed. Many of these misguided entrepreneurs either minimized the importance of marketing and promotion or ignored it totally.
A vital part of marketing is knowing who your competition is and always knowing what they are up to. The entrepreneur who ignores his competition is a fool (gee, was that too harsh?) and is always destined to fail, as proven by the fifty-five percent of the dead businesses in the survey who either didn't even know who their competition was or simply chose to ignore the competition altogether.
Here's a nice hole in the sand for you, sir.
Please insert your head?
Another mistake made by forty-seven percent of the deceased businesses was that they relied on just one or two customers for the bulk of revenues. This is a common mistake made by many business owners who devote all their energy to one huge client. What they don't seem to understand is that if that one customer goes away, so does most of their revenue.
When performing your business autopsy you might identify other contributing factors that were beyond your control, such as a down economy, the lack of qualified employees, new government regulations that negatively affect the way you must do business, the failure of a strategic partner, etc..
There will always be things you can't control. The key to business success is to keep control of those things you can and do everything you can to prepare for those things you can't.
Next time we'll discuss a few things you should and should not do to help ensure your business success.
Here's to your success.
Small Business Q&A is written by veteran entrepreneur and syndicated columnist, Tim Knox. Tim serves as the president and CEO of three successful technology companies and is the founder of DropshipWholesale.net, an online organization dedicated to the success of online and eBay entrepreneurs.