Small Business Basics
Failures to Avoid

(Date posted: February 20, 2009)

This page describes the business basics relating to typical small business failures, and methods used to avoid them. If any of these problems might affect your business venture, study this page carefully. Then apply these solutions when you start your own business.

Of course, you could say that a business fails because it runs out of cash or never makes a profit. However, these two reasons usually are just symptoms, rather than the underlying causes.

Here are the topics:

Faulty business concept
Inadequate advance preparations
Excessive startup costs
Not enough cash resources
Unable (or unwilling) to deliver a quality product

This page should also help you decide about starting your own business. However, that decision is entirely up to you.


IMPORTANT

Before using this information to start a business be sure to read the following notice: Disclaimer

Faulty business concept

The business concept is the basis for a proposed business venture. It's a good idea to validate this concept before starting the business. This is especially true if a business failure might incur a large loss.

You can validate a business concept using market research, financial projections, and a business plan.

If you cannot validate the business concept on paper, it normally is best to either change the concept or abandon the proposed business.

The business concept needs to make sense and be realistic. Many business concepts include certain implicit assumptions that may or may not be realized. It usually is a good idea to verify all important assumptions and estimates.

Following are some possible problem areas that the business concept may not consider or handle properly:

  • Costs and expenses may be larger than expected.
  • Intended customers may not want the product.
  • Owner may have chosen a poor advertising method.
  • Owner may not be able to get the resources needed to start the business venture.
  • Sales price for product may be too high or too low. (Strange as it may seem, prospective customers may ignore an item with a low price because they feel that it probably isn't a quality product.)
  • Sales volume may not grow as fast as expected.

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Inadequate advance preparations

After deciding on a suitable business concept, the business owner should complete any advance preparations needed before starting normal business operations.

These advance preparations serve to validate many of the assumptions in the business concept. They also prepare the business venture for operations. If the assumptions prove to be faulty, or the business venture is not prepared for operations, then the venture may suffer or even fail.

A large, risky, or complex business venture may require a certain amount of market research to validate the assumptions in the business concept. (For example, there is no point in starting a business venture if not enough customers want the product at its offering price.)

The owner may require a certain amount of training or information to be able to run the business venture effectively and deliver a quality product. The time to get this training and information is before business operations begin. (Customers may become dissatisfied if the owner needs a lot of on-the-job training.)

For help on planning, see the following topic from another section.

Stage 2: Planning and preparing for operations

Before beginning operations, the owner should satisfy all startup requirements for the business venture. This includes getting any required insurance, identifying and satisfying applicable government requirements, arranging for any required loans, contacting suppliers, and so on. (The government may penalize or even close down a business venture for failing to meet their requirements.)

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Excessive startup costs

There is a common expectation among new business owners that sales either will start out at a high amount or will start growing right away. But it's dangerous to rely on these "rosy" assumptions. The better way is to keep the initial costs and expenses low enough so that even moderate sales will be enough to show a profit.

The following pages can help you minimize startup costs:

Bootstrap Methods
Planning Costs and Expenses

There usually is no point in starting a small business that won't be able to show a profit for several years due to excessive startup costs or other large fixed expenses.

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Not enough cash resources

The surest way for a business venture to fail is to exhaust all of its cash resources. Cash is the lifeblood of every business venture.

Cash resources refer to both cash on hand, and the ability to raise additional cash when needed and prudent.

Following are the main reasons why a business venture runs out of cash:

  • Business venture has excessive operating costs and expenses for current sales volume.
  • Owner didn't invest a sufficient amount of cash to start the business venture.
  • Owner has withdrawn too much cash (for personal use) from the business venture.
  • Owner is unable to obtain needed loans.
  • The owner is unable to collect all the amounts owed by customers.

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Unable (or unwilling) to deliver a quality product

As far as your customers are concerned, the essence of your business venture is the ability to deliver a quality product. For most customers a quality product is whatever satisfies their needs and desires at a price they can afford.

Therefore, business owners must first determine the needs and desires of their likely customers. Then they must design a low-cost product that can satisfy these needs and desires. This usually requires that the business owners must be familiar with both their likely customers and the various ways available to produce and deliver their proposed product.

I have noticed a deplorable tendency in some business owners who seem to think that whatever type of product they choose to supply to customers should be good enough. They tend toward a "take it or leave it" attitude. Unless there is no competition, this is not the way to run a sound business venture.

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