Why So Many Small Businesses Fail and How Not to Become a Statistic

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In the past, and probably in the future, the most common reason small businesses fail is that the owners lack financial management skills.

Entrepreneurs know their trade. Whether it is delivering a product or selling a service, they have had experience in their field prior to deciding to become owners of a business.  Why do so many small businesses fail within the first three years of operation? The historical statistics that are available from many reliable resources may not be applicable in these uncertain times of pandemic and climate disasters. Nevertheless, reliable resources tell us that a majority of small businesses do, in fact, fail within the first three years.

In the past, and probably in the future, the most common reason small businesses fail is that the owners lack financial management skills. A small business owner hires a bookkeeper or an accountant to make certain they are compliant with IRS regulations, but he or she seldom steps away from the day-to-day issues and plans for the future.

Financial management skills for a small business include:

  • Bookkeeping/Accounting
  • Knowledge of economic opportunities
  • Strategic planning
  • A team that is able to execute a strategic plan

Unfortunately, entrepreneurs are seldom ready when they need capital and they are required to find a quick fix. Easy money is usually more expensive. These “emergency” borrowed funds are usually a band aid, not a cure. When a prospective borrower seeks funds from a third party – a bank, a private lender, the SBA, an investor, or even a family member or friend, he or she should have the financial literacy skills needed to evaluate how the funds will benefit the company. The prospective borrower should be able to prepare cash flow projections for both internal use and third-party review.

In addition, there are grants that are currently being offered to Small to Medium Enterprises (SMEs) to assist them through the present economic crisis, but seldom are consultants available to guide the grantees on how to use the funds to further their goals.  The grantor’s objectives do not always match the objectives of the grantee.

SMEs should seek counsel from experienced professionals who are willing to be advisors. Many successful retired entrepreneurs take pleasure in being advisors, but they lack the knowledge of current market conditions. Other advisors have personal objectives that bias their advice. A wise entrepreneur selects his resources and applies them to his advantage. Every market and every business owner has strengths and weaknesses. An SME should seek an advisor who has competency in a field that may be an SME’s weakness. Listen and learn!

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