Why Small Business Fails

One of the least understood aspects of entrepreneurship is why small businesses fail, and there’s a simple reason for the confusion: Most of the evidence comes from the entrepreneurs themselves.

I have had a close-up view of numerous business Failures —including a few start-ups
of my own. And from my observation, the reasons for failure cited by
the owners are frequently off point, which kind of makes sense when you
think about it. If the owners really knew what they were doing wrong, they
might have been able to fix the problem. Often, it’s simply a matter of denial
or of not knowing what you don’t know.

In many cases, the customers — or, I should say, ex-customers — have a better understanding than the owners of what wasn’t working. The usual suspects that the owners tend to blame are the bank, the government or the idiot partner. Rarely does the owner’s finger point at the owner. Of course, there are cases where something out of the owner’s control has gone terribly wrong, but I have found those instances to be in the minority. What follows, based on my own experiences and observations, are the top 10 reasons small businesses fail. The list is not pretty, it is not simple, and it does not contain any of those usual suspects (although they might come in at Nos. 11, 12 and 13).

1. The math just doesn’t work There is not enough demand for the product or service at a price that will produce a profit for the company. This, for example, would include a start-up trying to compete against Best Buy and its economies of scale.

2. Owners who cannot get out of their own way They may be stubborn, risk averse, conflict averse — meaning they need to be liked by everyone (even employees and vendors who can’t do their jobs). They may be a perfectionist, greedy, self-righteous, paranoid, indignant or insecure. You get the idea. Sometimes, you can even tell these owners the problem, and they will recognize that you are right — but continue to make the same mistakes over and over.

3. Out-of-control growth This one might be the saddest of all reasons for failure — a successful business that is ruined by over-expansion. This would include moving into markets that are not as profitable, experiencing growing pains that damage the business, or borrowing too much money in an attempt to keep growth at a particular rate. Sometimes less is more.

4. Poor accounting You cannot be in control of a business if you don’t know what is going on. With bad numbers, or no numbers, a company is flying blind, and it happens all of the time. Why? For one thing, it is a common — and disastrous — misconception that an outside accounting firm hired primarily to do the taxes will keep watch over the business. In reality, that is the job of the chief financial officer, one of the many hats an entrepreneur has to wear until a real one is hired.

5. Lack of a cash cushion If we have learned anything from this recession (I know it’s “over” but my customers don’t seem to have gotten the memo), it’s that business is cyclical and that bad things can and will happen over time — the loss of an important customer or critical employee, the arrival of a new competitor, the filing of a lawsuit. These things can all stress the finances of a company. If that company is already out of cash (and borrowing potential), it may not be able to recover.

6. Operational mediocrity I have never met a business owner who described his or her operation as mediocre. But we can’t all be above average. Repeat and referral business is critical for most businesses, as is some degree of marketing (depending on the business).

7. Operational inefficiencies Paying too much for rent, labor, and materials. Now more than ever, the lean companies are at an advantage. Not having the tenacity or stomach to negotiate terms that are reflective of today’s economy may leave a company uncompetitive.

8. Dysfunctional management Lack of focus, vision, planning, standards and everything else that goes into good management. Throw fighting partners or unhappy relatives into the mix and you have a disaster.

9. The lack of a succession plan We’re talking nepotism, power struggles, significant players being replaced by people who are in over their heads — all reasons many family businesses do not make it to the next generation.

10. A declining market Bookstores, music stores, printing businesses and many others are dealing with changes in technology, consumer demand, and competition from huge companies with more buying power and advertising dollars.

In life, you may have forgiving friends and relatives, but entrepreneurship is rarely forgiving. Eventually, everything shows up in the soup. If people don’t like the soup, employees stop working for you, and customers stop doing business with you. And that is why businesses fail.

Fire Protection Systems and Business

This article leans towards my career based expertise but relates to any business with assets that need protection from catastrophic fire loss.

Choosing the "best" fire suppression technology is not a simple task. A good starting point is to discuss your risks and operations with your insurance carrier. The large insurance companies have consulting engineers available who will have direct experience with the various systems. Your insurance carrier has a vested interest in getting you the best possible advice.

The fire department's primary concern is life safety, not contents. Their interest in your suppression system relates to safe exit of staff and visitors. It must protect the structure from collapse, which would endanger the lives of the fire fighters. Protecting the contents is therefore the responsibility of the owner.

The starting point for choosing a fire suppression system is a risk analysis to reduce the potential for a fire. Many hazards can be eliminated or reduced. The second objective is to mitigate the damage and to facilitate the recovery effort associated with the type of suppressant used. Regardless of which system is chosen, quality of installation and maintenance is critical. Your insurance carrier can also assist with testing and maintenance procedures. The following is an overview of the common suppression systems:

Wet pipe - A well-designed system will include flow monitors and pressure gauges to monitor the pressure on both sides of the valves when closed. Once the pipe flange seals set after installation and the system is monitored and maintained, it is highly reliable. There are probably more wet pipe systems than any others. They have an excellent track record and of course fast response. As long as it is not a deluge system, heads release as needed at a predetermined temperature as the fire progresses. Wet pipe systems should be discharged monthly (to the outside through an external valve), and pumps, valves, pressure gauges and alarms verified at that time.

Dry pipe and pre-actioned dry pipe and combinations thereof are considered to require more maintenance than wet pipe. Corrosion is a problem in systems with air or nitrogen in the pipes. However, they do have a place in freezing environments. There is a slight delay before water gets to the head at the rated volume and pressure. As with wet pipe, flow and pressure monitoring will alert you to problems. The pre-actioned systems are activated by sensors, and water release can be total or zonal with the heads releasing from the heat of the fire. Pre-action systems rely on smoke detection to get the water into the pipes. If the detection monitoring fails, the system is not activated. Both dry and wet pipe require that water be shut off manually.

Water mist systems are highly efficient but the technology is expensive. Small diameter piping is a plus and the use of a mist reduces damage to materials stored.

Fast response systems respond at an early stage of a fire. There are numerous types (release controls and heads) in this class of system.

Gas flooding systems are activated by temperature and smoke detection sensors. The gas is released under tremendous pressure. Statistics Canada is reported to have damaged certain records (shredded them) that were stored adjacent to the discharge nozzle. In computer rooms gas pressure is reported to have sent heavy floor tiles flying. These systems require that the room be extremely well sealed (doors, windows, ducts, piping, etc.) to achieve and hold the required concentration of suppressant. If the detection system fails there is no gas release. Should there be an equipment failure and the tank is discharged, there is no back-up. This is a major problem if the fire restarts itself. The length of time to get a tank recharged is a period of complete vulnerability.

Clearly the most important aspect of fire suppression is the sensing technology and monitoring (both technology and human, in-house and external). The next most important aspect after design is installation and maintenance. Every aspect of installation must be carefully monitored and inspected.

In one project, water pressure to sprinklers in a large records storage room was supplied by two 750 gal/min. pumps. The seals on the pumps were not evenly tightened during routine maintenance, which damaged the seals and the shaft alignment after about two years. Parts and repairs took almost one month for each pump. When a pump was out of service, there would have been an inadequate water supply to fight a major fire but sufficient for a small blaze. With shafts out of alignment, the pump might not have lasted long enough to combat a fire.

The pump and valve room should be well secured to avoid sabotage. Main supply valves should be locked open to avoid sabotage. Pumps require back-up power supply - another vulnerability.

At the end of the day there are no perfect solutions. You wrestle with options, choose one and accept the vulnerabilities. The protection of your structure, materials and people is reliant on good monitoring technology and safeguards, routine and thorough maintenance and a disaster recovery plan.

Keep Them Coming Back!!

Personal selling is one of the most important aspects of almost any business career – because you're always selling, not just to customers, but to your boss, your peers and colleagues, even your friends. Persuading others, pitching your case – call it what you want, but understanding how to get someone else to do what you want them to do is one of the most basic skills of being human.

In terms of dealing directly with customers, my favorite advice would come from Dale Carnegie's classic book How to Win Friends and Influence People. You can read all of the current how-to books you want but you won't find better, more concise advice. Remember people's names. Ask about their feelings. Try to understand them and their own points of view. These are the building blocks not just for great salesmanship, but also for lasting friendships.

What if you lose a client? What this question really emphasizes is how important it is to make sure that we do it right the first time, because once we lose a customer, as is clearly the case here, we may never get a chance to be able to talk to that customer again. We know that, so what do we do now?

Whether this is a business-to-business (B2B) or business-to-customer (B2C) setting doesn’t really matter. If it is a B2C setting then it's going to be very hard to go to a particular customer and make everything alright. If it's a B2B setting, then it's worth investing some effort into going back to the customer and educating him about the new things we have, making it clear what we can offer him now and also emphasizing what's in it for him by at least reconsidering doing business with us. In the meantime, what we want to do is make sure that we are doing everything as well as we can and hope that word of mouth will reach that customer and he might give us another try.

What else can we try? Possibly a loyalty program if it’s appropriate for your business environment. You will know. With all of the changes, mostly negative, taking place in the world of customer loyalty programming - growth in private-label credit cards, finding the right mix of hard and soft benefits, building an extensive (and often expensive) multi-channel communication program, fixing value of loyalty rewards in customers' minds, dealing with difficulty in redeeming rewards, changes in qualification for rewards, ability to reward best customers, and on and on - I'm more inclined than ever to believe that the best loyalty programs are no loyalty programs at all. Not that suppliers aren't, and shouldn't be, focused on creating the highest levels of customer advocacy behavior possible, it's just that loyalty programs may not be the best vehicle for achieving that goal. In fact, because these programs are typically built to drive more frequent purchasing, rather than create a stronger and deeper emotional and relationship bond with the supplier on an individual customer basis, they can even be counterproductive as a strategic device. Loyalty programs ought not be used as a crutch or surrogate for creating stronger connections with customers, and they too often are just that.

Although there are successful loyalty programs, to be sure, the most effective ways of creating the highest customer lifetime value are a) effective, continuously improved customer-related processes, including messaging and experience management, b) leveraging methods for assuring stakeholder engagement, continuity and productivity, especially among customer-touching employees, c) creating a customer-driven culture, building customer centricity into the DNA of the organization, and d) having a customer information system and database that is as detailed, real-time and actionable as possible, down to the specific customer and experience (i.e., divisible) level.