Posted by: Tom Chappell | May 2, 2011

Why Do Businesses Fail?

It seems that over the years, my service to my clients had morphed a bit.  In years past, people came to me just for information and advice on risk management and insurance.  After all, that is what I do for a living. Lately, however, I have been getting more and more questions dealing with general business issues.  I hope that is not a sign that I am getting old.  You know a lot of people equate old people with wisdom. 

Never the less, I recently was asked by a young man; what is the largest cause of business failure?  I suppose you could write a book on that question.  But, the question was not for all the causes of business failure.  He wanted just the biggest cause of failure.  WOW!  I had to think. 

I got it.  It is failure to plan.  Most small businesses begin because someone had a good idea, “they thought”.  Since it sounded good, it must be OK.  Right?  No, not right.  And failure to plan is the reason most small businesses fail.  So, what is meant by proper planning?  They don’t often teach practical business planning in college. 

Step one is to find a mentor – someone that has started a business from scratch and succeeded.  This is an individual that can share with you all the mistakes he made and what he would have done differently if he had it to do all over again. 

Hopefully, you are proficient with an Excel spreadsheet.  If not you may have to do it the old fashion way with a columnar pad.  Armed with these tools you start to identify expected expenses.  Include everything you can.  Rent, insurance, transportation, advertising, heat, lights and water, etc.   This will give you an idea of how much you must sell in product or service to break even.  Now, the question is how fast you can hit those levels of sales?  With this information, you will quickly get a feel for the feasibility of your business plan. 

Don’t get in a hurry.  This type of planning does not happen over night.  It requires research, great thought, and travel to other cities to visit similar business.  I started a new business about 10 years ago that has been a big success.  The planning process took more than two years.  It was worth it. 

Proper business planning, budgeting, building a pro forma will give you a hazy look into the future.  It will give you an idea of the capital needs of your new business, how many employees you will need, and when you will start seeing a return on your investment. 

Invariably the question of having a partner will come up.  My answer is that God didn’t have a partner.  If it is good enough for God it should be good enough for you.  I agree, that is a bit of a trite answer.  And, I must admit that I have a business partner and that relationship has been very good for both of us.  I was lucky.       

Most people make the decision to invite a partner to come into their business when they really don’t know the individual.  Usually, they are apprehensive about their new venture and having someone else to share problems with is comforting.  Fear is not a good reason to  add a partner.   Make sure you know the person and their culture before giving them half of your efforts, money, and ideas.  Once in, it can be very painful “un-ringing the bell”.  

Proper planning is the key to business success.  Failure to plan is at the root of most business failures.  Proper planning includes the structure of your business.  To have a partner, to incorporate, or to form an LLC, all fall under the veil of planning.

Just remember, if it works on paper doesn’t necessarily mean it will work in practice.  If it doesn’t work on paper, you better not try it. 

Good luck!


Responses

  1. Great advice…especially about partners. Would really like to hear more of your startup story.

  2. Excellent advice on what the biggest problem is … lack of planning. As it says fail to plan, plan to fail.


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