January 9, 2011

10 Reasons Small Businesses Fail

An article from the New York Times carried by Yahoo titled Top 10 Reasons Small Businesses Fail
gives this list of 10 reasons:

1. The math just doesn't work.
2. Owners who cannot get out of their own way.
3. Out-of-control growth.
4. Poor accounting.
5. Lack of a cash cushion.
6. Operational mediocrity.
7. Operational inefficiencies.
8. Dysfunctional management.
9. The lack of a succession plan.
10. A declining market. 

The article goes into more depth on each point and elaborates on their meaning.   Its quite a good list if you ask me.  If you're thinking of starting a business or if you are already running one then I think it would be good to make sure you're not vulnerable to any of the items.

Here's my thoughts on them.

1 and 5 are basically business plan items.   You need to make sure you have a product people will buy and that your capital will last.   This kind of failure may start from day one and could be insurmountable no matter how much of a genius you are at handling customers or other facets of running the business.  

2,4,6,7,8  all seem like items that are basically flaws or weaknesses of the business operators themselves.   If you don't do a good job running the business then it may fail.   Some are more understandable like #7 "operational inefficiencies" which any business has to keep an eye on.  But others like #8 "dysfunctional management" really translate into failure by the people running the show.

#3 is a sign of your own success.   If you grow too fast you can fail.  You do a perfectly good job managing a small retail shop with 5 employees.  But if you then decide to expand to a regional empire with 25 locations and 125 employees you may realize you're not capable of handling that kind of thing and it may all collapse. 

9, 10 are items that seem more like things that even good businesses may be vulnerable.    You might do a wonderful job running a business for many decades and then end up failing due to one of these.   Small businesses in particular are often ran primarily by a single person.  When that person retires or otherwise leaves then thats a key transition.   A very successful business may fail eventually simply because the world changes.  Just look at the New York Times themselves.   They and other print newspapers are on the path to failure if current trends continue.  They need to adapt to the new media or they will fail.

I don't run a small business myself unless you want to count our rental properties as a business which it is in a way.

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