Operator Error Is Why Most Businesses Fail

Q: I am thinking about starting my own business, but statistics show that most new businesses fail. Why do you think most businesses fail?

A: This is the column that probably gets me kicked out of the entrepreneurial chapter of the Priory of Scion. I look silly in those long robes anyway, so here goes.

A thousand apologies to my entrepreneurial brothers and sisters, but. I think the more important question is: do businesses fail or does the entrepreneur in charge of them fail? I have to be honest and tell you that I think most business failures must be laid at the feet of the person in charge.

Sure, there may be contributing factors to the demise of a business, such as a huge chain store moving in next door, a down economy, the lack of qualified employees, new government regulations, the failure of a strategic partner, etc., but any entrepreneur worth his salt should see such things coming and make adjustments to weather the storm.

And the truth is sometimes the storm can’t be weathered and you have to abandon ship. Is that a business failure or an entrepreneurial failure? I think the coin flips both ways.

Starting a business is never easy and the fact is approximately half of all small businesses fail within the first four years, with a large percentage of those failures occurring in year one.

There are many reasons why businesses fail, but according to a 2003 survey by U.S. Bank, the majority of business failures can be attributed to three reasons: bad management, bad financial planning, and bad marketing.

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 the 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, but that’s not enough to qualify me to go into the shoe business.

Seventy-three percent of the businesses surveyed were also managed by owners with rose colored calculators. These optimistic entrepreneurs over-estimated revenue and under-estimated cost.

Seventy percent of the failed businesses 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 more likely 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 hard to ask for help when you are supposed to be the one with all the answers. It’s harder still to lose your life savings when your business tanks.

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. Just because you eat at McDonald’s does not mean you’re qualified to manage one.

Bad financial planning was the second reason why most businesses fail. According to the 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 to begin with 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.

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.

Moral to the story: before diving in you should know the industry, know the market, and know the competition. You should also leave your ego at home, ask for help when you need it, be realistic with the finances, and go out of your way to tell every person on the planet about your product.

Will that guarantee the success of your business?

Not at all, but it sure can’t hurt.

Here’s to your success.

Tim Knox