Why Do So Many Small Businesses Fail?

by Brad Harmon on October 8, 2009 in Entrepreneurs

Stone Wall Close Up - Marketplace ChristianityYou have no doubt heard the statistic that 4 out of every 5 businesses fail within their first five years.  Sadly, many do not make it past the first year. Why do entrepreneurs continue to start small businesses every day knowing these odds?

Many are lured by the dream of being their own boss, attaining financial freedom, or spending quality time with their families.  Like the ancient seafarers in the Illiad, they crash their boats into the jagged rocks of reality while under the spell of the mythical siren’s song.  Some have described it as an “entrepreneurial seizure”.

Hmmm … I think I will Build a Tower

As entrepreneurs, we know this song very well.  It tops the charts in our minds and quickly becomes the song that we can’t get out of our head.  It becomes a driving force in our life – our passion.

When the song is loud enough to drown out all of the fears, doubts, and naysayers we jump in and start building our business.  I wonder if this is what the man Jesus asked us to imagine in his parable must have been feeling.

28For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it? 29Lest haply, after he hath laid the foundation, and is not able to finish it, all that behold it begin to mock him, 30Saying, This man began to build, and was not able to finish. (Luke 14:28-30, King James Version)

Can you picture the abandoned unfinished tower in the background as Jesus spoke this parable.  How many times have we seen such “towers” as we drive down the streets of our own towns?  Today, boarded up shops, going out of business signs, and foreclosure sales serve as a reminder of another entrepreneur’s hopes and dreams being crashed upon the rocks.

A Body in Motion …

In physics, Newton’s first law of motion states that a body in motion tends to stay in motion unless it is acted upon by an outside force.  How can we apply this same law to our small business?

If we just jump into the entrepreneurial waters with a sink or swim approach the odds are that the motion we experience will be sinking and the outside force will be the bottom of the lake abruptly stopping us with a thud.

There is no better time to sit down and count the cost than before we launch our business.  Once the business is launched, the motion of the day-to-day operations makes it very difficult to be able to stop and do this.

Counting the Costs

Despite all of the “get rich quick” schemes and “easy money” claims we see on the internet every day, there is no free ride.  Building a successful business is neither quick nor easy.  There are many costs to consider.

The most obvious cost is the financial resources necessary to fund and sustain both us and our business.  The primary reason businesses fail is that they are undercapitalized and are forced to rely on an ever increasing amount of debt to keep the business afloat.

Don’t confuse projected earnings with reality –projections, in terms of dollars or timing, rarely pan out as they are drawn up in your business plan.

Many entrepreneurs discover this too late and pour all their savings, mortgage their homes, and max out their credit cards attempting to postpone the inevitable thud approaching from their outside force (all too often a debt collector).

Dip Your Toe In Before You Dive

If you are like most entrepreneurs, you gave up a full-time steady paycheck to start your business.  Don’t underestimate the strain that this will put on your family.

Adjusting to a lower standard of living is not as easy as you might think.  It will take time to transition, but too many entrepreneurs wait until after their business is launched to start trying to make this transition.

If you have a two incomes in your family, try living off the paycheck you will keep for a full year before starting your business and put the other paycheck into a savings account.  If it’s just your income then live off the amount you would pay yourself during the first year of your business and put the rest in a savings account.

If you cannot make it during that year then chances are slim that you will be able to do so launching your own business and you will have saved yourself the embarrassment of the unfinished tower.

For Everything Else… There’s MasterCard?

The temptation will be great to finance your old standard of living via credit cards.  The sheer volume of advertisements your family faces will be a daily reminder of what they have given up.

Having to tell your family “no” is difficult, but it will be a recurring conversation.  This can lead to a tremendous amount of guilt that credit cards are all too willing to help you avoid.  Telling your family “no” now is only so you can tell them “yes” later to something much better.

This is something you want to make sure you discuss with your family before launching your business.

Recognizing the Signs

If your credit card debt is mounting then it is a sure sign that you are under-capitalized.  Take it as an opportunity to sit down and count the costs.  Remember, the day-to-day activities make this incredibly difficult to do, but recognize you may be one of those entrepreneurs who lose everything if you don’t.

Are the costs too great?  The only thing worse than being scoffed at because your business failed is being completely broke and in debt when you realized why all the others were scoffing.  Maybe it’s just a lifestyle adjustment that needs to be made?

Debt is a tool, but it comes with great risks.  It’s far easier to adjust your lifestyle before you get into debt than it is because you are in debt.

Finishing Your Tower

Owning your own business can be a great joy.  You can be your own boss, attain financial freedom, and spend more time with your family.  You can finish your tower.  It takes hard work, planning, discipline, and perseverance.

Just like Odysseus, you too can avoid the jagged rocks of reality where many entrepreneurs have shipwrecked their dreams.  You can listen to the siren’s song confidently knowing that your business is bound to the mast of a solid business plan because you took the time to sit and count the costs.

{ 11 comments… read them below or add one }

Dana@Online Knowledge October 11, 2009 at 3:42 am

If i am not wrong, what you try to tell in this article is that many small business is fail because the founder do not have a whole picture how to run that business. They short of ammunition to maintain and grow their business because do not prepare for it.

Reply

Brad Harmon October 11, 2009 at 4:16 pm

Dana,

Exactly, there are so many costs to consider beyond what I covered in my post, but too many small business owners just aren't realistic about what the costs are. They assume that they will be able to make a profit very quickly and be able to live off it.

Reality is that usually the costs come in faster than expected and money comes in slower. It is what I like to call a “cash gap”. That causes small business owners to start financing their operation with credit, but that generally means personal credit cards. At first it helps, but then it just keeps widening that “cash gap” and they can't recover.

Great comments!

Brad

Reply

truant October 12, 2009 at 4:15 am

Even I could'n understand your points clearly,I still leave a comment to appreciate your work!

Reply

Brad Harmon October 12, 2009 at 12:54 pm

Truant,

Thanks for stopping by my blog, and thank you for your comment. I am still new to blogging so I appreciate your feedback.

The main point I wanted to make was that entrepreneurs must sit down and make a business plan that is realistic or they will run out of funding and be forced to quit. I also wanted to point out that there are non-financial costs to consider.

The post had grown quite long so I tried to edit it to a more reasonable length. Perhaps I could have done a better job editing?

Brad

Reply

truant October 12, 2009 at 11:17 pm

Brad
It's not your post's problem.English is not my first language.So I don't understand what you're saying is my problem.:)I'm a new blogger too.Sorry for my poor English.Hope to read more posts from you.

Reply

Brad Harmon October 12, 2009 at 11:47 pm

Oh, sorry I misunderstood your comment. Good luck with your blog. I have learned so much about blogging over the past two weeks. I hope you enjoy it as much as I do.

Reply

truant October 12, 2009 at 11:54 pm

🙁
It's Ok.I can't express myself well through English.I will keep learning it!

Reply

Doug Dillard October 16, 2009 at 3:36 pm

Hi Brad… First time here. Great site and great post! Very informative and inspirational article. I like how you tie in Bible verses and sound business practices together. Very nice 🙂

Reply

Brad Harmon October 16, 2009 at 6:04 pm

Thanks Doug. There's over 800 references to money in the Bible so there are many gems that are very practical that I don't think many realize. I am hoping to shed some light on those.

Reply

marketingforsmallbusiness November 15, 2009 at 8:07 pm

Thanks for the review, i really enjoy reading it. but do you think that a small business will fail because the founder have no goals?

Reply

Brad Harmon November 15, 2009 at 8:32 pm

Many small business owners have dreams, and they think this is the same as having goals. Small business owners will rarely have success without clearly defined, measurable goals put into writing.

Reply

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