The typical ways that small businesses fail – Part 1

No new business operator wants to contemplate the fact they may fail. But refusing to heed the warning signs when your business is in trouble is a guaranteed way to end up a casualty.

More than 60 per cent of small businesses fold in the first three years of operation according to the Australian Bureau of Statistics. A report on corporate insolvencies by the Australian Securities and Investments Commission (ASIC) also reveals that 44 percent of businesses suffered poor strategic management, 40 per cent had inadequate cashflow or high cash use, and 33 per cent suffered from trading losses.

In my role as a Certified EOS Implementer, I am part of a global community of entrepreneurs who have professionally helped more than 5000 companies worldwide to implement the Entrepreneurial Operating System; a proven set of simple, practical tools that synchronise how people in an organisation meet, solve problems, plan, prioritise, follow processes, communicate, measure, structure, clarify roles, lead and manage. We consistently hear that many of these are small businesses who complain about things like staff issues, dwindling profits, and a lack of control and need guidance on how to get things back on track. It’s vitally important for small businesses to have clarity, accountability, discipline and focus in order to succeed in any market.

For any business that is struggling, or anyone contemplating a new small-business venture, consider the following:

Main mistakes businesses make when starting up – too much emotion and lack of experience

Businesses are often started off the back of emotion. The founder may have an idea that they are incredibly passionate about and can’t wait to see come to life. However, what often happens is that they quickly assemble all they need to try and bring this idea to life. Very quickly the entrepreneur can accumulate significant financial debt from associated start-up costs.

What’s worse is that very few have the necessary business experience nor acumen to take the required due diligence steps to first prove their concept prior to investment. As such, most businesses take an approach of “we’ll work it out as we go”, and whilst this has an almost romantic notion to it, it can spiral into failure simply due to a lack of know-how.

Key reasons businesses fail when underway – lack of management and planning

The main reason would have to be lack of proper management practices. This would typically be from the outset, whereby insufficient product or service testing is carried out to test the viability and demand for the product or service, followed by the actual cost to deliver the product or service, which is often far higher than anticipated. This step is often not completed adequately.

Another mis-step happens in the planning process. Owners need to take the time to plan out an expected ramp up rate of sales, and associated costs required to generate and support such sales. This information then becomes the foundation of the company budget and cashflow, highlighting the cash requirements over the first three years of operation.

The aim here is to identify both the point at which the business is expected to become profitable, and also when the cashflow becomes positive. Again, this step is often not completed properly or skipped altogether resulting in most businesses being undercapitalised from the outset and ultimately running out of cash.

Next month we’ll look at the tools you need for success, how to ensure that success is long-term, and how to resuscitate your business if it’s already floundering.

Daniel Davis, CEO, EOS Asia Pacific (the Entrepreneurial Operating System)

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