Why Small Businesses Fail – Top 3 Reasons Why it Can Be a Tough Ride

The term “small business” can refer to a variety of enterprises. A few common ones are sole proprietor v/s employee-owned business and corporation. There are many other types such as franchises, partnerships, and trade unions. When talking about small business, however, we usually think of it as having a small market share. And this is true for the vast majority of small enterprises, as there just aren’t that many people in any given business size.

Malcolm Baldrige was one of the pioneers of small business organizational values. He believed that if a business could be started with a small capital, it could be profitable and thrive for decades. Malcolpy wrote:”…there is no greater pleasure than working with your hands…but there is also no greater pleasure than serving your fellow men.” This principle inspired the saying, “Serving your fellow man is the highest obligation of life”.

Small business owners-and the owners of large corporations as well-rely on the value system of the people who are running it. It’s not enough to be great at what you do. Every manager in every business must be personally responsible for the success or failure of that company. Big business principles are based on that understanding; however, business owners-whether they’re company owners, managers, or CFO–sometimes ignore these basic precepts and instead look for the next best deal, the quickest fix, or the deal that will make them the most money.

Many small businesses fail because they don’t have a strategic plan. They don’t realize that by following proven, efficient, and ethical principles-core values that underlie business decisions and all of the small business activities-they will develop a business that consistently generates a million annual revenue. That million annual revenue doesn’t come without a mission. That mission statement defines the essence of what a business does, what it stands for, and how it goes about creating value for customers, investors, employees, and society in general. Without that mission statement, there is no purpose to invest in the products or services of a business; and no reason to operate one if the end result won’t be a profit.

In addition, there are a few other reasons why small businesses fail. One is that owners-managers and CFOs often misjudge financial opportunities that come along with specific markets. For example, many CFOs and owner-managers view small niche businesses-those operating within a specific industry, such as travel, home business, specialty shops, food services, or personal care services-as being untapped markets. These industries, however, generate enormous cash flows.

Another reason why small businesses fail to succeed is because the owners and managers fail to perform an effective, day-to-day intercity break-even analysis. In this analysis, a company breaks down expenses by vendor type and transaction type to determine the income that can be made from each transaction type. A good CFO should perform this analysis on a regular basis, so that a business knows where expenses are being spent most efficiently and which areas they are most profitable. For instance, if travel expenses are the highest expense in a city, then the owner-managers should look for opportunities to reduce travel spending in that city.

The third biggest reason why small businesses fail is the poor management of their debt-equity ratio (a ratio of assets to liabilities). A good CFO will make debt-equity ratios investments in the business’s future prosperity; if those ratios are too high, then a business may not be run by a CFO, but by a management team that is simply trying to keep the company solvent at all costs. That’s why a small business owner-managers need to perform regular and timely asset and debt-equity ratios assessments. These determinations will help a small business to ensure its long-term viability.

It is unfortunate that many business owners don’t perform adequate due diligence on their business before going public. They fail to perform an effective succession planning with their long-term business partner(s), as well as with management. Those companies which go public have much better chances of surviving because they are seen as being less-than-perfect, therefore the original investors will receive a much higher share of the business than they would have obtained if the owner-managers had performed a succession plan. If you own a small business, it is in your best interests to perform due diligence on your organization now so that you can achieve the financial security and future growth of your organization.