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Why Small Businesses Fail

By Melissa Zomro Davis

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As everyone knows, owning and operating a small business is risky. According to the U.S. Small Business Administration (SBA), 50 percent of new businesses will survive five years or more. The percentage of businesses that will survive 10 or more years is only 33 percent. The probability of survival increases with the firm’s age. It is striking that the survival rates have changed very little over time. So, why do businesses fail? There are a number of reasons.

For starters, most new business owners seem to have completed little to no research before hand. When people are thinking about starting a new business, they must research the following: the industry, the market, the customer, and the competition. Many questions surround those considerations. You must completely understand the industry you wish to enter. Working in that industry, researching that sector, familiarizing yourself with the dos and don’ts of that industry is a must. If you have no prior experience in the industry in which you wish to start a business, you’re already setting yourself up for failure. Make sure you research your market. Where will you sell and how will you sell? Knowing your market, and how to reach it, is incredibly important. Research who your customer will be. Know the customer’s demographic. Complete surveys to see if in fact the person you think will be your customer, is indeed your customer. Lastly, research your competition. There are two kinds of competitors — indirect and direct. Indirect is in the same field but perhaps has a slightly different focus. For example, you are a chiropractor and I am a chiropractor, but you see prenatal patients and I see athletes. Direct competition is when we both see prenatal patients. No matter what you sell or provide the customer with, you have competition. Customers can choose to spend their money on anything they wish, so you will always have competitors. Know who they are — both currently and potentially.

Another reason why businesses fail is that they are undercapitalized from the start. That means you’re always playing catch up financially. You need to research your costs to get started. Do the numbers make sense? When you apply for a loan in the amount needed for your startup costs, make sure you are also incorporating some working capital for those first few months. Working capital is a cushion to use for the first three to six months of operating expenses. If a lender comes back to you with a lower amount than requested, make sure you reexamine the numbers for your business. If you don’t adjust the startup costs to take into account the reduced financing, then you will be playing catch up from the start. For example, consider the story a business owner who was seeking $50,000 from the lender, and had $5,000 of her own money as a down payment. The total project cost was $55,000. The lender came back and offered the client $40,000 ($10,000 less than the $50,000 loan request). That $10,000 difference in the loan really ended up hurting the client because she was undercapitalized. She never went back and reexamined the numbers to make changes to the startup costs without having the extra $10,000. This put her financially behind the eight-ball from the onset of the business.

Businesses also fail because sometimes the owners are so good at making the products or providing the services, they forget all that comes with owning a business. Having management skills is a must. You must not only know how to do the job, but also how to run a business. You have bills to pay, employees to manage, projects to oversee, and much more. Management skills involve not just managing your employees, but also your time, day-to-day operations, and your clients. Organization will help you a ton in this area. A good inventory system might be the ticket, Quick Books could be the answer, or even a calendar. Whatever will help you better manage your business is an absolute consideration before you even open the doors to doing business.

Lastly, another reason that businesses fail is that they have little or no compliance with laws and regulations. Know what is required of you by law. Do you have to have permits to operate? Do you need special licenses? Did you get your employer identification number, certificate of authority, or your entity paperwork filled out correctly? If any of these things are overwhelming to you, contact the experts. For example, filing for an LLC or a corporation can be confusing. Hire an attorney to do it properly. Once a lawyer told our office he makes more money on the people who tried to establish their entity on their own than the people who just hired him to do it in the beginning. If you feel it’s too expensive to hire an attorney, then you are probably undercapitalized. Go to the experts in the areas in which you are not an expert. Make sure you have taken all the steps possible to be prepared.

Starting a business is not impossible. The biggest thing is to seek assistance. Research everything before you dive in head first. Be as prepared as best as you can. Will you know everything? Of course not. Each year is a new learning experience of how to do business better, more efficiently, and more effectively. Don’t stop trying to learn, research, or look for better strategies.

Melissa Zomro Davis, a former small-business owner in the equine industry, is a New York State-certified business advisor at the Small Business Development Center at Onondaga Community College. Contact her at m.l.zomro@sunyocc.edu or call (315) 498-6066.

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