13 Stupid Tricks by Business Owners
January 1, 2006
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Truth is some of these are stupid things business owners do to self-sabotage themselves. Some of them are true, a few myths, and some are my observations of the silly things I have done or seen done by other business owners.Names have been withheld to protect the guilty.
1) Fact Or Myth? Start-Up Businesses Have High Failure Rate 9 in 10 Will Close In The First Year?
There is a myth from the 1990’s that stated 9 out of 10 businesses close in their first year. The US Small Business Administration still gets calls every year from people looking for the unknown source of the 9 out of 10 sound bite. The myth persists partly due to a widely held belief that business closure is always considered a negative event.
Dun & Bradstreet (D & B) data from the same period shows a much different picture:
- 76 percent of new businesses were open after two years.
- 47 percent after four years.
- 38 percent after six years.
So why does the myth flourish?
Because it is generally believed that new businesses have high failure rates based upon a widely held but unsubstantiated belief that new firm closure rates are high and that a closure is a ‘negative’ outcome.
Key Survival Factors
The CBO study points to a combination of factors that play key roles in business survivability. They are:
- Hiring and employing the right people.
- Obtain adequate start up financing.
- The motivation of the owner is the key to surviving.
So businesses that start with adequate resources and the motivation to persist get larger which contributes to higher survival rates.
2) Business Closure Can Be A Positive Event
In an attempt to paint a more accurate picture of the success and survival of new businesses the US Census Bureau collected demographic data in a study called Characteristics Of Business Owners (CBO). This study took the view that in order to achieve success, entrepreneurs strive to continue in business or close/sell while the business is still making a profit and before losses pile up.
In analyzing the CBO data we attempted to answer the following questions:
- What are the closure rates of new firms?
- How do closures differ from business failures, and what factors contribute to them?
We wanted to look at the effect of the effect of the following factors:
- Financing.
- Employing others.
- Not being home based.
- Having a good education.
- Previous business ownership experience.
- Having multiple owners.
- Industry variables (manufacturing, retail and service).
- Gender and race variables.
The Statistics
The Results
After six years 60% of the firms close. These results are quite similar to the Dun & Bradstreet data above.
Perhaps we can now put the myth that 9 out of 10 businesses close in the first year! The question I was really interested in was how many closures were actually considered unsuccessful?
After Four Years 50% Remain Open
What Were The Factors That Caused 33% To Close Unsuccessfully?
The CBO study conclusively demonstrated firms with $50,000 or more in start up capital or had employees (other than themselves) they had lower closure rates. Whereas firms with no starting capital, young owners or proprietors lacked a post-secondary education had higher closure rates.
What Conclusions Can We Draw?
More Resources Reduce Risk: Not surprisingly, businesses that started with $50,000 or more, had employees, and previously owned another business had the lowest closure rates. The increased start up capital of more than $50,000, having a college degree, and starting a business for personal reasons contribute to an owner having more resources to develop the business. It also likely reflects bankers’ decisions to finance businesses that are judged more likely to survive.
Business Owners Persist For Personal Reasons: Starting a business for personal reasons gives the owner more motivation to make the business work and motivation to keep a business going. Despite the fact that the business is barely staying afloat, prospects for better business opportunities and even job offers – the owner gains satisfaction from the lifestyle to keep the business open.
Experience, Partners, Home Based Business Are Positive Factors: What is also interesting is that owning a business previously, having multiple owners and being home based at start up seem to increase survivability. A stay at home business owner enjoys the work at home lifestyle and is more likely to continue to operate a struggling business.
Youth, Lack Of Start Up Capital, Urban Location Lead To Higher Risk: On the down side, relatively younger owners (services, retail), not having start up capital, and being in an urban/suburban area lead to a higher rate of closure.
Certainly having employees, a good amount of starting capital, and an educated owner all contribute to higher success rates. What is interesting is that being young, having no start up capital were prevalent at closing. So even if a business fits a profile that points to a brief life span, the owners did not seem to see the firm’s brief life span as a negative outcome.
Young owners in urban/suburban areas are more likely to have better business or job opportunities. Therefore, owning a business comes with a higher opportunity cost for them and therefore they are more likely to close the business. Their viewpoint: start small, go after a business that is easy to start and easy to close.
3) Internal Deficiencies
Findings: Almost half of the firms that go bankrupt do so primarily because of their own deficiencies rather than externally generated problems. They do not develop the basic internal strengths to survive. This overall weakness in management when combined with a lack of market for their product is why these firms to fail.
Recommendations: Every one of these deficiencies under the control of managers and business owners can easily be neutralized with a thorough business plan.
Finances: create a business financial plan that includes income and expense projections, balance sheet as well as an income statement. Cash flow projections combine all three to show cash surpluses and shortfalls. Using this information allows management to make informed strategic and tactical decisions.
Human Resources: develop a plan for the recruiting, selection, and management of human resources. This means having the right people in the right seats, at the right time.
Marketing and Sales: every business must learn how to build a lead generation system. Qualified leads of prospects interested in your products and services.
Product Development: also referred to as research and development, any small business can identify new opportunities. Create a practical communication plan that will engage your new and long-time customers in a conversation designed to identify trends and opportunities.
Technology: technology today means more than just using computers and having a web site. Investigate and innovate to find new ways to apply existing technology to revitalize your business model.
4) Inexperienced Management
Findings: The main reason for failure is inexperienced management. Managers of bankrupt firms do not have the experience, knowledge, or vision to run their businesses. Even as the firm’s age and management experience increases, knowledge and vision remain critical deficiencies that contribute to failure.
Recommendations: what is your vision for your business? More than goals, a vision is a word picture that captures and describes the way the business will approach the market and stand apart from the competition. You must have a plan to manage the managers. Create a plan that includes measurement systems, regular performance reviews, and accountability.
5) The Learning Curve
Findings: The management of new firms face a learning curve. In the early stages of life, internal deficiencies are so prevalent that most bankruptcies occur for these reasons alone. Management must master the basic internal skills – general and financial knowledge, control, communications, supervision of staff, and market development – or it will fail solely from the weight of these problems.
Recommendations: the only antidote for management deficiencies is either training or dismissal. Would you hire you? Do you need to be fired? Build a plan for your own professional and personal development. Make a list of areas that you need training and support and then create an action plan to fill those gaps immediately.
6) Managing Growth
Findings: As a surviving business grows a new set of problems arise that are associated with the increased complexity of running an older and often larger firm. Managerial issues such as the poor use of outside advisors, lack of emphasis on quality, an unwillingness to delegate responsibilities, departure of key personnel, and ‘personal’ problems associated with the owner/manager become relatively more important factors that contribute to failure as a business ages.
Recommendations: create an informal team of advisors. Retain a good CPA that will do more than prepare your financial statements. A business coach is a generalist that can help you put structure and control to the growth. Find someone who will teach you the intricacies of the financial side of your business.
If you are dealing with personal issues, your marriage, and financial stress, get support. Find a business coach for the business issues and a counselor or therapist to deal with your personal problems before it is too late.
7) External Events
Findings: Over half of bankrupt firms did develop these strengths, at least to the point that they did not fail primarily due to a lack of them. External events were cited as the primary cause of their downfall. But even here, these firms still suffer from deficiencies that are partly of their own doing.
They did not develop the internal competencies necessary to ride through the external shock, such as an economic downturn or increased competition that caused bankruptcy.
While poor management skills were generally less of a factor in firms that failed for external reasons, managers’ deficiencies such as lack of vision, initiative, flexibility, and adaptability were still problems that were associated with bankruptcy. Marketing competencies were also relatively more important in the case of externally generated failures than for internally related failures.
Recommendations: a good business plan will identify external events that could threaten the business. Negative events could include an economic downturn, increased competition or a serious accident. The creation of a contingency plan should discuss solutions for responding to these events.
Poor Financial Planning & Controls
Findings: Some 71% of firms fail because of poor financial planning. Three particular problems arise in this area, they are:
- Unbalanced capital structure.
- Inability to manage working capital.
- Undercapitalization.
Both old and young bankrupt firms suffer this deficiency. This confirms other findings that initial problems in financial structure are difficult to overcome and continue to haunt firms as they age.
Recommendations: without a solid financial plan that includes budgets, projected financial statements you will never have a true picture of what it will take to truly succeed. Either out source the building of your financial plan to your CPA or purchase software to help you create it. It will become a benchmark that you can use to measure your effectiveness and make informed decisions.
9) Management Failure To Acquire Adequate Financing
Findings: The underlying factor contributing to financial difficulties is management failure rather than external factors associated with imperfect capital markets. Many bankrupt firms face problems in attaining financing in capital markets; but it is the internal lack of managerial expertise in many of these firms that prevents the exploration of different financing options.
Recommendations: take an accounting class. Inquire at your local college or university and enroll in a series of accounting courses. Look for the more advanced courses in financial management. If this is not workable, hire a consultant to help you prepare a financing package that will meet your long terms goals.
10) Inability To Raise Additional Capital
Findings: Management of bankrupt firms might have taken several steps to avert problems. Additional capital in the form of equity is seen to be the key to survival for both those firms with major internal problems and those that failed due to external factors. In addition, seeking the advice of outsiders is regarded as a important step in minimizing deficiencies on the part of management.
Recommendations: a three-year business plan with detailed pro forma financial statements can help to identify the need for equity. You can then use this information to create a strategy to increase equity in your firm that will allow you to weather a rough period.
11) External Shocks Or Events
Findings: Economic events were reported to have affected 68% of bankrupt firms. Plus increased competition and loss of key customers or volatile demand for good and services are a major factor contributing to business failures.
It is the combination of external factors beyond your control that contribute to the possibility of failure. When a company has to deal with an economic downturn, the loss a major customer, forced it to deal with increased competition, you have a very challenging situation even for the most experienced of business owners.
Recommendations: review your source of revenue and calculate how many customers it would take to put your business in financial straights. Then create a competitive and customer retention plan.
12) Procrastination
Findings: A Canadian study of bankrupt companies revealed that the majority of bankrupt firms should not have been saved. However, if certain preventative actions were taken earlier the bankrupt firm might have been in the position where it could and should have been saved. What were the two important factors?
- Raising additional equity is seen to be important about half of these firms might have been able to avoid bankruptcy had they pursued this option at an earlier stage. This conforms to the observation that many bankruptcies arose because of internal limitations in financing options due to a lack of equity in bankrupt firms.
- About 42% might have avoided failure had they turned to an outside consultant for help in offsetting managerial deficiencies. Renegotiating with debt holders or suppliers was the suggested solution for about one-third of these firms.
Recommendations: the value of outside consultants is the perspective they bring to the table. They are able to see your problems and issues without the interference of a personal stake or agenda.
If you are unable to afford outside consultants ask another business owner that you respect for help. Create a buddy system and provide mutual support. Take on a business partner or hire a professional manager.
13) The Value of A Plan – As a Management Tool
In reviewing these studies I found that bankrupt and successful firms had similar business plans and financial plans.
The major difference was that 81% of successful firms would periodically take stock of where they stand with respect to their goals and followed up by making adjustments to their practices and expectations.
The sad news is that less than 33% of bankrupt firms with financial forecasts in their business plans actually compared their results with their forecasts and only 40% of those took any remedial action when their forecasts differed from their goals.
If you are like me, does that strike you as just silly or what? If you do not know what is going on in your business (what is working, what isn’t) you will never know what needs to change to make sure you reach your goals.
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This is really good stuffs. I’m being through startup and still into startup:) And I can say this is really solid recommendation.