EP31: Why Small Businesses Fail: The 5 Most Common Reasons

Why do small businesses fail? This week we examine the 5 most common reasons why businesses don't survive long term. 

Join me as I illustrate how multiple factors can contribute to a business's downfall, including cashflow issues, weak marketing, and the founder themselves.

And don't worry -- I don't leave you hanging. You'll get several possible solutions to each problem helping you to prioritize for a sustainable future. 

This is tough love – not meant to discourage you, but to inspire and push you towards proactive steps for your business. 

So, listen up as we dig into yet another reality of small business ownership.

Transcript

Speaker 1: 0:00

Hey, this is a really quick ad break because I got to pay the bills. The Business Blast for Me podcast is sponsored by Corporate Rehab Strategic Consulting. Corporate Rehab provides strategy operations and leadership growth support. So if you're ready to clearly identify what you and your business need to move to the next stage of growth, book a call, head to the show notes and click that link. That wasn't so bad, was it? Welcome to the Business Blast for Me podcast, where we question the sacred truths of the online business space and the reverence with which they're held. I'm your host, sarah Kahn speaker, strategic consultant and BS busting badass. Join me each week as we challenge the norms, trends and overall bullshit status quo of entrepreneurship to uncover what it really takes to build the business that you want to build in a way that honors you, your life and your vision for what's possible, and maybe piss off a few gurus along the way. So if you're ready to commit Business Blast for Me, let's do it. Hello, hello, blast Femurs.

Speaker 1: 0:59

This week's episode is a bit of a serious one. I'm putting on my consultant hat, really tapping into my experience, my education and a fuck ton of research because, honestly, there have been a lot of conversations in the online business space around how hard it is to keep business going right now. I know that the space itself is hard overall. Right Fewer people are buying at the rate they used to. Revenue numbers aren't being met across the board, no matter what the champagne sip and coach over on Instagram is telling you. Business is down everywhere and people are struggling, and it's not news. I've been talking about it here and on social for weeks. So today I want to actually move to the next step. I want to tell you, I want to show you, what to do about it, especially if you feel like your business is failing, sinking on the rocks, whatever you want to call it. And this is really and truly not meant to be a Debbie Downer episode. This is more of a Tough Love Truth episode that I hope gets you thinking, because if your business foundation does feel a little shaky right now, hopefully this episode helps you take a more pragmatic look at what you can do about it. And if your business feels fine, then hopefully this episode helps you to stay alert to what to look for, because the bottom line is, we all became entrepreneurs because we wanted to succeed. We wanted to build something for ourselves, maybe for our families, our legacy. We're not here just shooting the shit. So today I'm taking a little less of a sassy pants approach and we're going to look at it more like Sarah the business consultant approach. So here we go.

Speaker 1: 2:43

According to the Small Business Administration, 33% of small businesses will fail in the first two years and about 50% will fail in the first five. How many go on to survive beyond 10 years or so? Less than 30%. There are a lot of reasons why businesses tank. Okay, not enough demand for your product, no proven or vetted offer or revenue stream. You grew too quickly. You're spending too much money. You can't maintain a healthy level of cash flow. You're not keeping proper financial records and so you have no clear understanding of your cash flow situation. Your marketing isn't effective. You hired the wrong people, like. The list is actually really long. So I'm not conceited enough to sit here and tell you that business fails for X reasons, and X reasons only.

Speaker 1: 3:31

I used to work in events and one of my roles was training in event safety, and we used to teach our new team members the what we called the Swiss Cheese analogy. So I want you to imagine a slice of Swiss cheese. It has some holes in it, right? So imagine you have several slices of Swiss cheese on a sandwich and you pour mustard or mayo or whatever on your sandwich on the top of all that cheese. Now, each slice may have a hole in it, but so long as all of the holes don't align with each other, right, so that first slice the hole doesn't align with the next slice down, whatever you put on top of the cheese will be supported that ketchup, that mayo, whatever but the minute the holes start to line up, disaster, because all that shit will start to seep through.

Speaker 1: 4:15

Business is kind of the same. But having said that, there are reasons that are common to the majority of businesses that don't do well, that don't survive. So what are the top five reasons a small business might fail? Well, I've consulted a number of sources on this particularly touchy subject. So I've looked at, you know, investopedia, the Harvard Business Review, small Business Administration, the Better Business Bureau. I've read about a dozen LinkedIn articles and I actually even got some information from AABRS. They are a UK based personal and corporate and solvency firm. So, based on all of that research, I feel like we've picked out the five reasons that the majority seem to have a consensus on. So here they are.

Speaker 1: 5:08

The first one is obviously money issues. You're either not making enough money or you're spending too much, or both. Now what I've learned is that most business owners are intimately aware of how m uch money they actually need to run the business day to day, so things like payroll overheads, but they're less in tune with how much money they're actually generating. Or they're living in a future income state versus a now income state. So they're living in a state of like in the future, I'll have this much money. So they're making decisions from a future state versus this is how much money I have now state.

Speaker 1: 5:44

And as a business grows, what tends to happen is that the overhead costs obviously increase, but the revenue generated from new and ongoing sales doesn't. So how do you fix that? Look, I'll be completely honest with you. It is not a fun answer. You cut unnecessary costs. Reducing your costs will not only save your business, but it'll buy you more time to uncover what's really going on, like what the real problems are and help you deal with them.

Speaker 1: 6:10

You know, come up with a plan. Now that may include having to let go of some team members and running on a scaled back staff. That's obviously hard, especially because when you're an entrepreneur, you've likely cultivated really close relationships with your team and they become friends and they become really hard to think about. You know letting people go, but this is usually the biggest source of income going out of the business, and no one said being a leader was easy. Now you can reduce the cost of your marketing expenses if you're spending a lot of money there, but again, that may not apply if your primary source of marketing is social media.

Speaker 1: 6:45

The third thing to look at is any miscellaneous spending. So you know, is there anything you're spending money on that you can do without? For now, that includes in your personal spending, not just your business spending. So what you consider then is limited. You know, if you've looked at all of the money stuff, now you consider limiting the services and products that you offer and you focus only on those things that are most profitable for you.

Speaker 1: 7:09

Now this is really hard for some founders who are visionary types, because it's the new ideas and the excitement, like. That's where they find their satisfaction. But hey, there's a reason. I still do operations, implementation work. I have to pay my fucking bills. If I could live off doing my podcast and, you know, the odd speaking engagement, this would all look very, very different. Ultimately, you have to remember that being a founder, being a CEO, being a business owner, is ultimately about making hard decisions, pragmatic decisions. This is one of those adulting decisions that never gets easier, but it is what it is. So Do you need to cut your costs? Maybe it's worth having a look at and then consider maybe doing some of the work that you don't always like doing, but you knew it was profitable and it made you money. You got to sit down and have a come to Jesus with yourself. That's what I'm saying.

Speaker 1: 8:03

The second reason businesses fail not trusting the team you hired or not hiring a team and doing it all on your own. I've seen this with solopreneurs who are really high on the visionary spectrum. They don't want to work with other people or, more likely, other people can't really work with them because they're quote unquote too visionary, and what I mean by that is too many ideas, not enough understanding of how much harder the operation side has to work to support the constant influx of new ideas. I had a client once who every Monday I'm not even exaggerating, like every Monday we would come to the team meeting and they would have a brand new idea they wanted implemented that week, and that meant scrapping the idea we were working on from last week, and it was just. It was a lot of work and that's hard for your team and also that's not the best way to run a business.

Speaker 1: 8:50

Most founders have this incredible skill very necessary to entrepreneurship to create and sell amazing ideas, services, products, but they're not often as good people managers and so they struggle to manage a team right. Smart ones will delegate that shit to a people manager or an ops manager, and that solves one problem. But then actually listening to their team, trusting them, is the second piece to that. Having a trusted team that you listen to means sometimes having to let go of ideas that excite you, because the team is often closest to the customers and you know what they really want. Or they can see the operational bottlenecks, or they can see the bigger picture. That's not a dig at all at visionary founders, no, but it's meant to keep you in your zone of genius. Okay, lean on your team and be honest about what's happening in the business and solicit their feedback and support. It's not all on you. Plus, all of the research shows that a lack of transparency from the founder has been proven to be a major cause of disengaged team members. So there's that right.

Speaker 1: 9:55

The third reason most businesses fail is overall business planning, especially in the online small business space. Honestly, in this space, there is almost a complete lack of actual business planning, especially because of the rhetoric that all it takes to start a small business is a phone and a laptop and maybe a swimming pool. I know I'm being facetious, I apologize and also I don't apologize. That is not true. If you want to run a business that has a chance of actually beating the stats, you need to have a sound business plan, not a giant fucking 600-page document that you see people submitting to investors on Shark Tank and all that crap. But at the very least, you should have a clear description of the business. Okay, so like, what is it you're going to do, aka, what problem are you solving in the marketplace? That's kind of critical, right.

Speaker 1: 10:51

Your business plan should also outline any current or future employee needs that you have or management needs. Yeah, you've got to think ahead. You should 100% do a SWOT analysis. So strengths, weaknesses, opportunities and threats especially the opportunities and threats in the broader market you should have an understanding of your cash flow needs and your budget for at least the first year. If you're really ambitious, the first two to five years. Yes, again, planning ahead right. And you should have a clear understanding of the market. So that means doing a competitor analysis. One of the big reasons most businesses will struggle is not believing that there are any competitors out there. So understanding what you're up against is kind of important.

Speaker 1: 11:34

Yeah, so hands up if you've done all of that for your business. I don't see very many hands up and, by the way, I'm sorry, I'm really really trying hard not to be mean. That is not how I want you to take this. I'm not calling you out, okay, I am calling you in. You are here because we're on the same wavelength and I want you to be successful. I want you to succeed and so I want you to also understand that if you haven't done this, there's always time. You can do a business plan at any point. So if this is something that you have not done and you really kind of want to do it, dm me, I'll walk you through it. We will talk about it. If you want support with it, cool, we can talk about what that looks like. But this is something you should do no matter what stage of business you're at, especially if your business is pivoted or it's grown and things have changed because the plan that you started with is not the plan you're going to finish with. It's critical to do a clear plan so that you have a plan and also you'll know realistically where your gaps are and that can help mitigate future problems. Hopefully that makes sense.

Speaker 1: 12:46

Here's reason number four Businesses fail because they suck at marketing, and I don't just mean they don't market, which a lot of small businesses don't do. Let's be completely honest, right? I've seen a lot of people who think that because they talked about their offer or their service on social media once or twice a month, they've marketed. But really you haven't. If you're not talking about your business, you don't have a business. I think I've said that before. Or they don't have a marketing plan at all and they're chasing the wrong success metrics. You know they're looking for a huge following, or they want to go viral and they think that if I can go viral, I can make it. But here's a spoiler alert for you Virality does not increase engagement or revenue, and that is the metric you should be following like a fucking hawk. Are your marketing campaigns, your marketing efforts, converting into actual sales and if yes, what's the ratio? If no, why the fuck not? This is one of the reasons why I truly think that a VA or an OBM is not always the first right hire for a solopreneur. You should hire a marketing manager or a marketing consultant to help you figure out what your marketing plan is, because that is the shit that's going to help you make money. But there are too many founders that are like I've started a business and I want to stand my own genius and they go and start hiring team members to delegates. It makes them feel special. Fuck that shit. You want your business to work. You got to sell your business. Ok. Now here's the fifth reason, and I swear I am not picking on founders, but reason number five founders, all right.

Speaker 1: 14:17

Entrepreneurs are an incredible breed of human. They have the guts to go and try new and innovative things. They're not scared of a little risk. They have incredible vision. They have the ability to thrive in creation and manifestation, and it's wonderful. And as you hit the growth stage of your business, shit is going to get boring, because it has to If it's going to survive long term. It needs to become more bureaucratic, more process oriented, and you honestly need to take fewer chances, or at least far more calculated ones.

Speaker 1: 14:53

I'm not saying you turn it into a corporate, but I'm also saying you need to be acutely aware that as you grow, you need to take a page out of the corporate playbook in order to survive long term. Growth does not survive in a vacuum, and the laissez-faire, come what may attitude that got you here as an early founder is not going to get you there. So as you grow, you need to invest less in friends and more in specialists. You need a clear set of processes. You need to have a plan that you follow and that the team can follow. Yes, you can still take risks the risks actually become exponentially bigger but almost every element of your business now has to up level as well.

Speaker 1: 15:36

Maybe now there's a hierarchy. I know some of you are like ew, but really there's a hierarchy because you need to have something everyone can follow and everyone knows how to go to. Maybe now you have an organizational chart. There's someone who is clearly in charge it doesn't have to be you Rolls on the team become more formalized and specialized. There's less crossing of lines and crossing of boundaries in what was once a free-for-all, where everyone is dug in and all hands on deck in an environment and for someone who is an entrepreneur, your instinct may be to fight all of that, because it does start to feel corporate. I promise you it's not, not if it's done with intention and it's led by your vision. This is where you get to go back to your mission and your vision and see if you're truly embodying them. It becomes more and more important to make decisions that are better for everyone, not just you anymore, and that can be incredibly challenging too, but the payoff is worth it.

Speaker 1: 16:38

Now, having said all that, how do you know if it is actually time to let go, like to just let go of the whole thing? Well, that's up to you entirely. There's no threshold for what failure and I say that in quotes okay looks like, and there are a lot of really profound definitions for things like failure and success that I won't bore you with today. You can Google them. There's a ton of really beautiful graphics that talk about it.

Speaker 1: 17:03

But if you are worried all the time, if you are mentally drained, if you are emotionally spent, honestly, to the point where it's really begun to impact your health, then at the very least it's time to take a break, to get some space and to reassess. I know a lot of entrepreneurs who've done this over the last couple of years. You know they've taken time away and then come back with a renewed sense of purpose and clarity that they lacked before. Some of them closed their business down to take a break and some just took a break, right, kept the business running but took a break. It really depends on what your situation is and what it allows for, but that is something that you owe to yourself and to your business.

Speaker 1: 17:42

If things are feeling hard, you need to take time away, because it isn't taking time away that that clarity comes. And please do not beat yourself up. Do not think you have quote unquote failed If you come back with the decision that your business has done. This is really the only place where we like hold on to things with a death grip, right In any other area of your life, when you stop being interested or invested in something, you quit, and we need to normalize that being okay in entrepreneurship as well.

Speaker 1: 18:16

If you are done, then be done, give yourself grace, and if you're not, then take the time to figure out what you need to do to keep going. That is not gonna constantly put you in an emotional and spiritual and mental deficit and a financial deficit and a time deficit. Talk to somebody who can help. If you've got no one to talk to come talk to me. That's what we do, all right, and that's that. This may have felt like a really heavy episode, but remember there's nothing you can fuck up so badly that it can't be fixed, and success and failure are fluid. You get to decide what those definitions are for you and for your individual situation and, if nothing else, this should serve as a reminder that if you desire to run a quote unquote real business, it's never too late to start treating it like one.

Speaker 1: 19:16

And if it would be helpful to know what your current state of the union looks like, sign up for a free assessment on my website, getcorporaterehabcom. We will look at where you are in terms of business maturity and growth and what you need to prioritize right now in order to continue building a sustainable business that beats the odds. Head to the show notes for the link. That is it for this week. You can have success without the BS and guess what You'll fucking deserve to? I'll talk to you soon. That's it for this week. Thanks for listening to the Business Blast For Me podcast. We'll be back next week with a new episode, but in the meantime, help assist her out by subscribing and, if you're feeling extra sassy, rating this podcast. And don't forget to share the podcast with others. Head over to businessblastformepodcastcom to connect with us and learn more. Thanks for listening and remember you can have success without the BS.