Why Do So Many Small Businesses Fail?

Failure is undoubtedly one of the harshest realities of the business world and while many would like to believe that hard work and dedication are all you need to achieve success, the painful truth is that approximately 50% of small businesses will fail within their first two years. So, given these staggering odds, what can you as a small business owner do to avoid becoming a statistic? In episode #103, Elizabeth Larkin and Gene Marks discuss the main reasons that so many businesses fail and how you can avoid these common mistakes.

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Transcript

Elizabeth: Gene, I don’t want to bum anyone out, but today we’re going to be talking about why so many small businesses fail.

Gene: Failure is my middle name.

Elizabeth: Part of life.

Gene: Yeah. It happens. We all fail at things. Michael Jordan said, “I failed, I failed, I failed, I failed, until I succeeded.”

Elizabeth: That’s very true.

Gene: Yes.

Elizabeth: That’s a good way of looking at it.

Gene: Yes.

Elizabeth: I do have one question though. Do you know the stats, and I’m sorry to put you on the spot, but how many small businesses do fail?

Gene: Well, apparently, 50% of- we talked about start-ups before- but 50% of new small businesses fail within the first two years of existence. 50%. It’s a huge number. And the number even goes up over the next five years.

Elizabeth: Wow. Okay. Well after we hear from our sponsor, we’re going to talk about the three reasons why small businesses fail.

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QUESTION: Why Do So Many Small Businesses Fail?

Elizabeth: Okay. We’re back, and today’s question is why do so many small businesses fail at the rate of 50%?

Gene: Yeah. So, first of all, there are a lot of reasons why … you can’t just generalize them on all businesses that go out of business, why they went out of business. So I can speak to what I see among … with all the business owners that I speak to and I can give one of the big reasons. And that reason is math.

Elizabeth: Oh my goodness.

Gene: I’m a accountant by training-

Elizabeth: Nerd.

Gene: -nerd, and so math is important to me. Accounting is important to me.

Elizabeth: Does it just come second nature to you?

Gene: No, it’s not. There’s a basic level. You should be fairly good with numbers and then there’s a lot that you go … it’s not that complicated to learn the numbers you need to know to run a business, a typical business. It’s not that complex to do, but it amazes me how many people start up businesses that really either don’t have their arms around math or don’t know accounting or just don’t want to. Like, “It’s boring to me. I don’t want to know about it.”

In the end, a business is a business is a business. It’s got …there’s dollars and cents involved. There’s math involved when you’re running this. You have to- I’ve said this a thousand times- you have to know how to buy something for a buck and sell it for three and how do you know that the three dollars is actually profitable to you? You need to know what your margins are. You need to know what your sales are. You need to be able to compare your sales versus prior periods. You need to be able to know when you give a quote, what’s the lowest price you can quote something for? What’s the highest price you can quote something for? You need to know what your overhead is, so you need to … sort of that monthly nut that you’ve got to meet. You’ve got to know a lot of numbers to run a business. A business is all about numbers and I do find that those who succeed in business have got their arms around their numbers. So that’s important.

Elizabeth: So if you were one of those small business owners out there who’s like, “I’m not a math person,” what is your first line of defense there?

Gene: Well, first of all, you have to be a little bit. You can not delegate the math entirely to somebody else. You just can’t do it. Otherwise, you shouldn’t be a small business owner. It’s like somebody saying, “I’m going to be in a Broadway show but I’m not a singer.” You know what I mean? Okay, well, I don’t know how far that takes you. If it’s a musical, you have to be able to have some level of singing, so you really might not be in the right profession if you are not prepared to get your arms around math.

And what that means is, you read or you take a class or a seminar or your small business development center or you to go to school or … Local accounting firms run these things where you can learn some basic accounting, basic bookkeeping. You know what I mean? And so therefore you’re able to calculate not only what your cash is in the bank and what your receivables are but what you expect it to be in the next 30 to 60 days, or calculate the true cost of a service or a product. You learn these things and these are basics.

And then I think anything above and beyond that, yeah, you can delegate that to an outside advisor or CPA, somebody like that.

Elizabeth: So, you can look for e-courses, in-person courses-

Gene: There’s plenty of context.

Elizabeth: -and there’s also tons of Excel templates that you can download that kind of do this work … they visualize what you need to know for you.

Gene: Correct. There’s the community colleges who give these courses all the time. High schools give these courses-

Yeah. It’s just … You should learn business accounting. You need to know it’s your … it’s the DNA of a business, is the books.

Elizabeth: So if someone’s thinking of running a business, that was the first thing you’d tell them to do.

Gene: Yeah. Yeah. I’d absolutely say, “Do you understand accounting and do you understand math? And are you … and even if you don’t, are you prepared to learn it?” Because if that’s not your thing and you’re going to run away from it, running a business might not be your thing.

Elizabeth: I’m one of those people who says, “Math just isn’t my thing,” but honestly-

Gene: It has to be. To a certain level, it’s got to be. Yeah.

Elizabeth: Yeah. I mean, you have to be able to dig in. And math is not that difficult.

Gene: It’s really not. I’m not talking about calculus and I’m not talking about advanced formulas. I am talking about simple adding and subtracting and division that I think that you need to know, and how a basic set of books works, and accounting works. It’s very, very important for you to know this stuff. You should be able to look at your financials, your balance sheet, your income statement at any given time and know whether or not you’re truly profitable at what you’re doing. It shouldn’t be a surprise.

Elizabeth: Okay. So number one is math. Number two?

Gene: Timing is a big thing.

Elizabeth: Timing. Okay.

Gene: Right? I think a lot of businesses … I’ll give you a perfect example. There was a store near me in Center City, Philadelphia, and it was an ice cream shop. Actually, even beyond that. They sold popsicles, custom popsicles, like weird flavored popsicles.

Elizabeth: You know what, I think you told us about them last year.

Gene: Yeah, well, anyway. They’re not in business anymore and … they sell popsicles and they launched their business in October. Do you know what I mean? I’m like … you … really … we’re going into … you’re going to be paying rent for … and salaries and whatever, and health insurance or whatever, through the winter. Nobody’s buying popsicles in the winter. And then you know … So much of life is about timing. Some of it you can plan on and some of it you can’t. But-

Elizabeth: Also, that is a seasonal business in the northeast.

Gene: True.

Elizabeth: If you want to open that business in south Florida, sure.

Gene: Right. Correct. There … which it’s … location is another thing. We’ll talk about when you’re starting up a business and why you failed but people just make the wrong … they just make … you make the wrong decisions as to when you’re going to launch your business. You do it at the wrong time. The product isn’t at the …. isn’t timely enough. Maybe you weren’t ready to yet because you didn’t have the right resources in place or the right employees there. So timing of a business, if you time it wrong- particularly when your money’s tight and capital is low and … your in startup mode, you can really give yourself a problem.

Elizabeth: Okay. What’s the type of business that you think works year round? You could open it … there’s tons of them.

Gene: There really are. There are the seasonal businesses that depend … But anything that doesn’t depend on the weather is something that is a good year-round business and I think that when we talk about startups and why they fail, a lot of times people start businesses because they’re more sexy rather than profitable. They have some cool idea to do a popsicle shop, for example. Or something … wouldn’t that be a great idea … whereas, really, there are so many profitable businesses that you could run that just aren’t that exciting but again, it is a business. So a pizza shop. A job shop, if you’re good with your hands. A drywall business-

Elizabeth: Sounds very exciting.

Gene: Pizza is very cool. Hard. It’s a really hard business to run, but that is a business that’s not … I don’t consider that to be seasonal. I think that’s great year-round. There’s other businesses that are, again, like I said, job shops or … if you’re in the construction business. These are not exciting businesses, but they’re needed.

And that’s the other thing. We get back to timing. For example if you’re going to start a construction business, now seems to be a pretty good time to start a construction business, mainly because we’re in early 2018 and the economy seems to be going pretty strong.

Elizabeth: You got March, April-

Gene: Yeah. We hear the government talking about maybe the infrastructure spending and people are building around. That’s great. But if you time your start of a construction business wrong, when there’s a … potentially going to recession, that could immediately put you out of business. So it goes back to that.

Elizabeth: Okay. Alright. So number two- number one was math and lack of knowledge. Or lack of embracing math.

Gene: Yeah. Lack of embracing math. Yeah.

Elizabeth: Number two is timing.

Gene: Right.

Elizabeth: Whether that’s seasonal or just starting your business when you don’t have the right employees in place, and number three is …

Gene: Resources. And if you notice, Elizabeth, I’m not saying capital, per se, I’m saying resources. Resources does include capital, but it includes other things. It includes the right-size facilities, the right people in place. Clearly, cash in the bank and financing available but even more so, and most importantly is time. A lot of people do not estimate the time that’s required to get a business off the ground and running, but not only the time that you’re spending but also the time commitments that you’re kind of giving up from your family or from your significant other. And I’ve seen a lot of businesses-

Elizabeth: Or just your life, your hobbies, your down-time.

Gene: They go under because the spouse is complaining because the startup owner isn’t around much. Or the startup owner is like, “This stinks, man. I’m here 24 hours a day, trying to get this thing … This is not what I signed up for. I wasn’t ready to spend this kind of time.” And they bail. So it is a real question of whether you have all the resources in place. Most important resource, even more so than money, is time. Not only of you but also of your family as well.

Gene: I mean, there’s so many other different things, other factors that go in. Location is a big impact on startup businesses.

Elizabeth: For non-home based businesses.

Gene: Correct. But again, people pick- for retail shops, for restaurants, they make the wrong decision where they’re going to open up a business, and it’s not located in the right place. They didn’t do their planning well enough for that and they go out. It makes me laugh. There was … I wrote about this years ago, somewhere else. Not on The Hartford but it was about the … how when a CVS store would open, there was this trend where within a year, a Rite Aid would open right across the street, or right down the … like right there. I remember it catching my attention, thinking why is there … there’s like a … it’s the same reason why when you see a hotel open up, certainly fast food restaurants start sprouting up around it and then other hotels sprout up around it as well, because it’s drawing in.

So if you pick the wrong location for your business, your restaurant, your retail business, even if your business demands searching customers, it could put you out of business just by that wrong decision. That’s another big factor.

Elizabeth: Is there a five?

Gene: Product choice and services, the market. A lot of businesses start up thinking that they’re going to offer a product or service that’s going to be fantastic and everybody’s going to come pounding, breaking down their door to buy it, and nobody does. Or they say, “You know what, this is … This doesn’t exist. This would be great to have. You know what I mean? A hairbrush with a toothbrush on the other end so you can brush your hair and then brush your teeth.”

Elizabeth: That is so stupid.

Gene: “That’s genius! We should be selling that! It’d be fantastic. We should” … Some people come up with it without really doing the sort of the market research. Sometimes the best things for startups to do is, entering into an industry or a place where there’s already products there, and offer … because you know there’s a market there. People are buying this stuff. It exists.

Elizabeth: Because it’s really expensive to create your own market.

Gene: Yeah. That just happens … It doesn’t happen that often. So you go into existing markets and places that are going to offer a similar product but it’s going to be a little bit better for this reason. But at least that way, there’s a market that’s there for it. A lot of people just kind of thing because they like something, or they think this is neat and cool, they’re like, “Everybody’s going to line up to buy it.” So making the wrong decision on market is bad.

And then another … we’ll add one more reason why startups fail. It’s just a lack of planning. And when I mean lack of planning, I will include in that overly-optimistic planning as well. People sit there, and they say, “Okay, if we’re going to do this business, we need to plan … if we’re going to open up a store, we need to spend some time scouting out the right location for that store.” That’s planning. What people am I going to need? What assets am I going to need? What finance will I need? You need to spreadsheet it out as [inaudible 00:14:03] and then when you make your assumptions for revenues, are they reasonable, conservative assumptions. Because a lot of people say, “Sure, we’re going to open up and double our sales.”

Elizabeth: How can you check yourself if you’re being too enthusiastic? How do you check that?

Gene: So, you have to ask other people that are in the business. You have to get that reality check. Now a lot of times, competitors may or may not want to share that information with you. So sometimes when people are starting up- again, if they’re going to start up a microbrewery in Hartford, okay. If there are other microbrewers in Hartford, and they’re all around, maybe you don’t want to talk to them because they’re competition, so you go on a road trip. Maybe you travel down to Philly or you travel up to Boston or somewhere else, and then you find somebody and ask them. Say, “Listen, I’m out of your … I’m not going to compete against you. What would you expect?” People will share that information with you, got to talk to people in your industry and they will give you the straight and narrow as to whether or not this is worth it or not, or what to expect so you can do your proper … you got to do due diligence before you start that business up.

Elizabeth: Now, the other thing you could do is just go sit in their parking lot-

Gene: And watch. You could do that. That’s part of the … that’s-

Elizabeth: -the cars. Oh, I was joking. Gene’s like, “Yeah, that’s … “

Gene: No, no. You could absolutely. That should be … just to see what kind of volume a typical place gets that makes … Believe it or not, that’s all part of the time you have to put in before you start up a business. This is all like, oh, easier said than done. You know what I mean? I’m just saying this stuff, like “Oh, sure, we’re going to go out. Who has the time of day to do this?” This is the stuff- I’m just telling you what successful people that have survived startup-hood have been able to do. They do this stuff. They pick the right location. They have the right timing. They plan. They have enough resources. They know some math. This is what they do.

And I’m not saying that people that don’t have all these things in place can’t succeed, but you are significantly increasing your odds if you don’t have those things in place.

Elizabeth: So I’m going to add something to the list. I think it’s growing too quickly. I think that’s what you would call it.

Gene: Sure.

Elizabeth: Let’s say you’re a one person, a “solopreneur.”

Gene: Right.

Elizabeth: You’re a small business-

Gene: Oh and you’re a mom, so you’re a mompreneur as well

Elizabeth: Or a dadpreneur or whatever. And you start this business, and the first person you hire is you start working with an accountant. That totally makes sense, even Gene is nodding his head. He’s in agreement.

Gene: Sure. Sure.

Elizabeth: And then you think, “You know what? I think I’m going to get a bookkeeper, because I don’t feel like dealing with this.” But you don’t really have the money for that yet.

Gene: Right. Right. So growing too fast is certainly … or spending money unnecessarily is an issue.

Elizabeth: You want to keep it … you want to keep your overhead as small as possible.

Gene: Sure. Well, it’s kind of like it’s be careful what you ask for, you just might get it. And a lot of times, people go out of business for that reason there. They don’t plan for growth. Their forecasts are such that … They didn’t do enough planning so that suddenly they have more customers than they expected to have and they don’t have enough inventory or financing available to service them. That’s certainly a really great aspect, something that could cause a startup to fail.

Elizabeth: Okay. Well we hate to depress everyone today, talking about why small businesses fail but if you’re listening, your small business is either a success or you’re thinking about starting a small business so hopefully some of these tips will be helpful.

WORD OF BRILLIANCE: Talking Stick

Elizabeth: Okay. We’re back with Gene’s Word of Brilliance.

Gene: So as usual, it’s not just one word. This time, it’s two words, Elizabeth. It is “talking stick.” What is a talking stick?

Elizabeth: Okay. So I would think that it’s something that you hold in a meeting if you’re the one person who’s going to be doing the talking-

Gene: Genius.

Elizabeth: -to keep everyone else from talking.

Gene: Yes. That’s exactly right, and actually, in the most recent budget negotiations, when the government was facing a shutdown and nobody could agree on anything in Washington, a group of senators got together and they used this talking stick method that actually got them to agree on a compromise for the budget. And the talking- by the way, there was … things were being thrown before that and lots of profanities, but the talking stick … it is an ancient tradition that goes back to civilizations from before.

The talking stick in some civilizations was encrusted with gold or jewels. It was a sign of power, and whoever had that talking stick had the power of the conversation and the way it worked is, like you just said, you would pass the talking stick around. Whoever has the talking stick has the floor, and then they can talk and nobody else can. And it is … it was instrumental for these people in Washington, these senators and congressmen who were doing this budget debate. And I thought … I wrote about that because I thought about a talking stick is … It really is a wonderful tool to use when you’re having meetings, potentially, if they’re a contentious thing and people are interrupting each other. They’re going back and forth, or whoever is leading your meeting is not able to sort of keep things in to control. Next time that happens, you’re going to consider that talking stick approach.

Now the other thing just to keep in mind is, I don’t … it wasn’t said when I did that research of these senators and congressmen who had this whole conversation with the talking stick where they were limited on time, but I do recommend that you do that.

Elizabeth: Oh yeah.

Gene: So you say, “If you get the talking stick, we’re going to now set the timer on your phone. You get two minutes, but you’ve got your floor, and do your thing.” But to do that in a meeting is, I think, a really great way to get things back on track and to give everybody a chance to say what they have to say without it turning into a big thing.

Elizabeth: Now, do you … Would you require everyone has a turn at the talking stick or just people who want to talk?

Gene: Just the people who want to talk, I think. Why? Do you think it should be everybody?

Elizabeth: I think it would … Well, I think if you have some employees who have really great ideas in private and they like to communicate with you one-on-one?

Gene: Sure.

Elizabeth: Maybe they don’t want to talk in a meeting but you want them to? That would be a good way to say, “Everybody gets the talking stick. You can say I agree with So-And-So.” That can be your only contribution, but …

Gene: Sounds good. I mean, it depends on the way the meeting is being run, but I think it will bring organization to your chaos, if you’re having that kind of challenge with meetings in your company.

Elizabeth: That would be good, because I am constantly interrupting people because I think I know what they’re going to say. So I interrupt them. So people should probably use that with me.

Gene: I actually have a similar problem. I’m so bad in meetings because I want to just take the meeting over and cut to the chase and get this done so I can get out of there, or whatever. And that’s rude. Everybody should have a chance to talk. So I think it would benefit me and the productivity of a meeting if we had a talking stick because it would shut me up. Like that.

Elizabeth: And then would it just kill you to have to listen to everyone else?

Gene: A little bit. Yeah. But I’d abide by the rules. The talking stick is the talking stick.

Elizabeth: Alright. We’ll be back next week with another exciting episode of the Small Biz Ahead Podcast. Thanks for joining us.

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