Why do small businesses fail? And how to survive

Why should you care?

I wrote this article aiming at business owners or entrepreneurs that are thinking of creating their own business, particularly sole traders. This article is for you if you are concerned about your business success, are currently struggling in one or more areas of your business, or want to pre-empt any problems you might face when creating your business. So why do small businesses fail?

There are a myriad of reasons why businesses fail, and it’s not just small businesses that fail. History is full of cases of very big companies that fail, sometimes after decades in business. In this article we’re going to focus on small businesses. I’ve recently read the E-Myth Revisited by Michael E. Gerber and these are my thoughts on the subject of why small businesses fail.

In any business, three fundamental roles are performed to varied degrees of effectiveness. The three roles are that of the entrepreneur, the manager, and the technician. For sole traders, these roles are filled by the same person.

The degree to which these three functions are successfully carried out is one of the primary causes of failure for small enterprises. Let’s now look at what each of these roles entail.

Understand your role

The Entrepreneur

The entrepreneur is the dreamer, the risk-taker, the strategist. They will start a business venture, or adventure you might say, usually with the goal of making a profit. After identifying a need in the market, they will strategize to fill it. They take calculated risks, create and innovate, and are motivated by the opportunity to bring their ideas to life and achieve financial success. They invest their time, money, skills and resources to see their vision turn to reality. Business owners usually do not understand that the entrepreneur is not just the actor that kicks-off the business creation, they are also essential to prevent businesses to fail.

The Manager

The manager organises and coordinates. They are responsible for keeping the business running smoothly. They play a crucial role in the success of a business by leading, motivating, and directing employees towards the achievement of specific goals and objectives.

This is relevant for sole traders as well. The individual puts on the manager hat and leads and motivates themselves in order to achieve their targets. They also keep things organised in the business, this varies significantly depending on which business you’re looking at. From organising workspace and work related paperwork, to specific work activities. If without the entrepreneur there’s no business, without the manager there’s no successful business. So, you can say they are also essential to prevent businesses to fail.

The manager is there to ensure the work is carried out efficiently and is aligned to the organisation’s goals, standards and vision. The manager will carry out several crucial tasks. Implement the strategies the entrepreneur came up with. Create and manage budgets. Develop and maintain policies and procedures. Monitor staff, production and operations performance. Communicate effectively with employees, stakeholders, and customers. Everyone needs to understand the standards, the vision and the goals and expectations of the organisation.

The Technician

The technician in essence, does the work. Without the technician, there’s no product or service to sell as they’re the ones producing the product or delivering the service. They’re skilled to perform technical tasks in a specific field. They often have specialised knowledge and training in the use of tools, and processes specific to their field. The type of work performed by a technician can vary widely, depending on the field in which they work. Regardless of the specific field, technicians generally work to ensure that equipment and systems are functioning properly, and they often diagnose and resolve problems when they arise. Usually, technicians like to be left alone to do what they do well and are not concerned with any of the tasks carried out by the entrepreneur or the manager. That said, just like the entrepreneur and the manager, they are also essential to prevent businesses to fail.

Understand your business

First you want to love your business, be proud of it, believe in its mission and how society can benefit from it. But then, you need to know your business, really know your business. What do I mean by that?

Obviously, you need to know your business goals and timelines associated with each. Without timed goals/targets and plan to achieve them, businesses wander until their inescapable demise.

You need to know your business’s SWOT. Strengths, Weaknesses, Opportunities and Threats. Knowing how your business performs in each of these areas is key to manage it effectively and plan for a successful future. By doing a swot analysis, you’ll know who your competition is, who your customers are, where your business fits in the market, what other markets you can tackle, and the list goes on.

All of what I have exposed so far is of the utmost importance for a thriving business. But I want to focus on the significance of understanding how your entrepreneur, manager and technician are performing. You see, I want to make the case that most small businesses fail because of poor performance by one or more of these actors. Most small businesses start because a technician is momentarily assaulted by the entrepreneur’s passion and spirit. That moment is enough to kick-start the process of creating a new business; for the ones that do open a new business. More often than not though, that’s where the entrepreneur lives and dies, in a fleeting moment of inspiration, never to return.

This is an important point to understand, since most small businesses are “managed” by technicians. Sometimes a manager emerges but in the inevitable struggle with the technician, the latter wins and consumes the vast majority of the time the business owner dedicates to their business.

Running the business

So, you now have a business without its creator, the entrepreneur. But all is not lost, or so it seems. The business has an outstanding technician that keeps delivering exceptional products/services. All is good, and the business is thriving. Who needs an entrepreneur that can’t produce a single piece of; insert whatever product or service the business provides; at even of a standard quality? Business is actually growing, customers really appreciate the technician’s product/service and keep coming back for more.

Things start getting a bit hectic though. Paperwork, workspace, and communication with customers are taking a toll due to the increase in work. In order to deliver to all customers, the technician is getting to a point where they’re working too many hours on the product/service and not enough hours, or none at all, on organisation and communication. This is usually when some businesses owners start falling out of love with their businesses and that’s the first domino that eventually leads businesses to fail.

The Business is Growing

Management and Delegation

The technician accepts that help is needed. There’s just too much to be done and not enough time to do it. But what help are they going to get? They will look for help with the tasks they don’t want to do or don’t know how to do. These vary from business to business, but some key tasks are commonly outsourced to new employees in small businesses. Bookkeeping, sales, grunt work, helping with whatever is needed.

Eventually, a manager is recruited to help organise and manage the staff and even the business operations. One of the mistakes business owners often tend to make is to delegation by abdication. What I mean by that is that the business owner will employ someone to do a task they can’t or don’t want to do and leave that employee on their own to get the job done.

This usually doesn’t happen straight away. At first, the business owner micro-manages the new employee and if the new employee survives that and shows to be able to do the work to an acceptable standard then the abdication takes place. This can take a couple of days to a couple of weeks but usually not much longer than that. One of the two will make the decision to end the contract if things are not working. So eventually, the business owner ends up abdicating their responsibility to make sure the tasks are carried out competently and aligned to goals, standards and vision of the business. To note that this happens mainly because the business owner is too busy with their own technician’s work.

Micromanagement

Also of note is that it can be quite common for business owners to behave in the opposite manner and micromanage their employees for the entire length of employment and independently of performance levels. This behaviour also impacts the business negatively as they end up neglecting other tasks in detriment of supervising their employees. Notice that I said supervise rather than manage. Also, their employees will not be happy in their employment and seek to move on as soon as it becomes possible. This will impact costs, productivity and quality of product/service since there will be a need to recruit and train new employees. Small businesses with with high churn rate struggle to compete in the market place.

Delegation by abdication

But coming back to delegation by abdication which is an ubiquitous problem in small businesses. Some good examples are:

• A bookkeeper is left to their own devices as long as they don’t deliver bad news.
• A sales person that works unsupervised as long as they’re bringing in the numbers.
• A manager that is not herself managed.

The list goes on. And the consequences are dire. In most cases, the end result is a business where the owner continues to be buried under technical work; as orders continue to increase; and they have no understanding of what goes on in their business. If there’s a top 3 reasons why small businesses fail, I’d posit this would make the list.

Is the bookkeeper looking into how the current financials align with the business goals? Are they providing actionable information that allows for pivoting or addressing areas of concern, or for helping adapt the business plan, so it keeps aligned to the business goals? Is the sales person selling using the business standards and communicating the business vision/mission effectively? And the the customer service, are they representing the company’s values and providing correct information to customers? Is the manager motivating and developing staff, so they can be as productive as they can be and following the organisation’s procedures and standards?

Unkempt Growth

The business growth might be what kills it. As it grows, the business needs more than ever an entrepreneur to strategize how to support that growth. Does it need funding, address market risks, enter new markets, innovate a process, product specification, service capability, etc… It needs a manager to identify operational risks, make sure the growth is sustainable by recruiting, managing and organising the business operations. And it needs the technician, usually, an increase in technicians. The challenge is that the business owner needs to wear all these hats even after starting to recruit for several roles within the business and always keep accountability for all roles in the organisation.

The business owner is the Chief Executive Officer (CEO) of the company and as such, responsible for every single area of the business. The CEO is responsible to make sure the technician is following procedures, delivering within quality standards, and behaving in accordance to company’s values and mission. The same applies for every other role in the company no matter how big or small the company is.

How to survive — Have a plan

Business plan

A business without a business plan is not a business I would dare say. It’s not a viable business with good chances of success for sure. So start with a plan.

Outline your business — what it is, what it is not. What is its mission, vision and values. Its products or services. Its audience or target market, and any financial projections. What differentiates your business from all other businesses.

Identify its Strengths, Weaknesses, Opportunities and Threats (SWOT).

Define its goals and make sure they’re specific, measurable, actionable, realistic and time bound.

Write down your strategy to achieve those goals. Detail every step you will take to make those goals a reality.

Organisational Chart

Create an organisational Chart with every role required for your business to be successful, not today, but when you achieve all your goals. If your goal is to have a company that generates a million euro a year in revenue, you’ll probably need a big team with some key roles in it. Or if your goals include opening three restaurants instead of just the one you’re starting with, you will need to account for all the roles you will need.

Sole traders

So you’re a sole trader just starting your business venture, but your goal is to grow it up to a stage where you have 50 to 100 employees and a few million euro revenue per year. You will need, today, an org chart that includes at least the following:

• The CEO
• A Chief Operations Officer (COO), Operations manager, team leaders and technicians.
• A Chief Marketing Officer (CMO), Marketing specialists, Sales Manager, Sales persons.
• A Chief Finance Officer (CFO) and an accountant or two.
• A Head of HR, recruitment specialist and HR specialist.
• A Training and Development manager, and a trainer or two.

You just need to put your name in every single role of that org chart.

Documentation

You need to document everything. Not just the Org Chart, not just income and expenses, not just a business plan. Everything! If you take an action in the running of your business, you document it. If you change the way you do something, you update the documentation. You document tasks in such a way that if you ask someone on the street to come over to your business site and give them the documentation to a certain task, they’re able to perform the task without issues. Obviously, for creative/artistic pieces of work this will not be suitable, so we’ll exclude those.

Use whatever tools you have available but in this day and age, it’s mandatory that they’re stored and accessible digitally. Cloud storage solutions should be affordable to most, there’s even free options; with some limits on storage space; that might suffice to most businesses at least when starting. Microsoft OneDrive and Google Drive should do the trick.

Lack of proper documentation is one of the reasons why small businesses fail.

Survive and Thrive

Execute your plan

A written plan has no benefit for a company if it’s not implemented correctly. There’s one caveat though. A business might get funding just based on a good business plan. That’s definitely a benefit, but will be short-lived if the plan is not implemented correctly.

You execute your plan diligently. You monitor what works and what doesn’t, and you adapt and update the documentation. Also, you recruit new employees to carry out tasks that you don’t want or don’t know how to do. But you retain accountability for all roles within the organisation, their behaviour, performance and wellbeing.

You make sure that as the business owner, you wear the three hats that make it possible to run and grow a successful business. The entrepreneur’s hat, the manager and the technician. And because none of these roles is more important than the others but also not less important, you need to wear the hats for roughly the same amount of time. So lets say that you dedicate 60 hrs a week to your business. You should wear each hat for roughly 30% of the time. Roughly 66% of the time you’re wearing the technician and manager’s hat, you’re then working 40hrs in the business. The other ~33% of the time, you’re the entrepreneur, working on the business.

Good luck and good fortune

I hope this article provides some value to you. Maybe it can help you create a more successful business from the start. Help you address some issues you might have identified with the way you’re managing your business. Or maybe it gave you an idea or two to improve the way you run your already successful business. Whatever your situation, I wish you good luck with your endeavours. Because it’s not easy to create and grow a successful business, a bit of luck on top of everything else that needs done is always welcome. I would also recommend reading The E-Myth Revisited — Why most small businesses don’t work and what to do about it by Michael E. Gerber