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5 Reasons Small Businesses Go Under

By Edited Sep 16, 2015 2 7

Everyone dreams of escaping the rat race. We all want to be free, well off and able to do what we like, when we like. This basic human instinct, for freedom and material progress are the two main reasons why people choose to start their own business. And it seems relatively simple. Almost any skill that we use to make our employer richer, we can use to increase our material well being and give us the freedom we want. The quintessential small business story goes something like: "Joe was a cook. A very good cook. One day he decides to open his own restaurant. After hard work and dedication, Joe was able to hire a manager and a chef to look after his business, and is now living life on a beach somewhere in the Caribbean". Yet the road to financial freedom is a rocky one, and for every success story, there are probably ten businesses that went under. However, there is still hope. Businesses go under for reasons that can be avoided, and here are five of them:

1. Cash flow problems- The biggest reason businesses fail is due to lack of stable and substantial cash flow. You may have the best product, the best idea, the best staff and the best business, but if you can't pay the rent, or the bank at the end of the day, you will lose it all. Cash flow management is tough, especially in the beginning stages, as your business is trying to grow, and you need to start paying salaries, loans, utilities, rent etc. A cash flow balance sheet is essential, because it lets you see where the shortfall may occur, and allows you to plan ahead so you're not stuck with a wad of bills to pay, and no cash to do it with.

2. Improper Staffing- Many people start businesses and decide to employ their cousin, his friend, his friend's music teacher's son and so on. Don't hire people out of nepotism; hire them because they can contribute to your business. Of course, if your cousin's friend's music teacher's son just happens to be a mini- Gordon Ramsey and you're opening a restaurant, by all means, go ahead and hire him. Just don't do people favours because you know them. A business isn't a charity, so make sure that everyone will benefit before you hire someone.

3. Improper Research- An ice cream shop is a great idea, just don't open one in Alaska. Do your research! Know the market, the competitors and what people are looking for. Obviously, the above-mentioned example is a glaring exaggeration, but you get the jist. You have to know what people want and if it's already being given to them. Just because you can make a mean triple chocolate vanilla bean fudge ice cream from scratch doesn't mean that someone who lives in the snow for six months of the year will buy it. A good product can only get you so far, but it is your knowledge of the market and its conditions that can take it further.

4. Being a Copycat-Just because McDonalds makes billions from selling burgers and shakes doesn't mean that you can too. Don't just copy an established business idea and hope you can steal customers away from your competitors. To succeed, you have to be original and distinctive. Sure, if you can make the best burgers and shakes, and sell them faster and for less than McDonalds, go ahead. But its always better to carve out a niche for yourself, instead of trying to copy what someone else has done.

5. Lack of Passion-Don't open a business for just money! Be passionate about what you do, and set goals for yourself. Remember, opening a business means that it will take over your life until you can get it to "stand on its own two feet". If you're used to 9-5, and that's all the time you want to put in, then opening a small business may not be for you. You have to be committed, and that is easier when you are passionate about what you do.

I hope this article helps any budding entrepreneurs out there. Although a small business may not be for everyone, it is certainly something that is within everyone's reach. You will know if that kind of life is for you, and if it is, pursue it. Entrepreneurial people waste their talents working for others, and they need to be on their own to bloom. If that is you, then follow your dream, open that ice cream shop (just not in Alaska) and make the best of it. And remember, if you fail, try, try, try again. Loans can be repaid, jobs can be found, but material freedom is something that must be earned. Best of luck with your ventures, hopefully we will be reading about your success soon enough.



Aug 18, 2010 11:47am
This is all very true information on starting a business. Many people don't market properly either and waste their advertising dollars - there's lots of places to advertise for free these days. Thumbs up!
Aug 18, 2010 12:10pm
very useful info thanks i like Being a Copycat
Aug 24, 2010 4:23am
Advertising is being revolutionized. Just look at all the companies having their own blogs now hehe... :)
Aug 28, 2010 10:40am
Another factor is over-expansion. This will lead to cash flow problem.
Oct 10, 2010 3:24pm
The second reason is not necessarily valid. At first you should try not to hire anyone. Of course there are businesses that need employees but at first you, the owner, should try to do as much of the work as possible. First off, it saves you revenue. Secondly, it gives you the hands on experience of how you would like you operation to run. This creates the template you will use for training.
I know a successful pasta sauce maker who started by making his grand mother's sauce recipe in his own kitchen. Once he served enough friends and potential backers his sauce on pasta he made as well and received the feedback to fine tune his product he learned how to jar the sauce.
After he mastered the equipment and techniques of jarring he learned how to make labels on his home computer.
When he finally had a pasta sauce in a jar he could take to potential customers he approached Whole Foods. Once they approved his ingredients he began giving demos in their closest store.After a few months he approached their regional sales people and they agreed to carry his sauce in one region.
This was when he hired his first employee, a part time retired woman who did demos at one store while he did another.
Now a few years later he is distributed by two regions of Whole Foods stores, he's been on the Food Network and hired a packaging company to jar and ship his sauce. He total in house employees is up to ten, all demoing his sauce in stores.
So at first do everything yourself.
Great article.
Oct 15, 2010 10:11am
Thats very true, but it also depends on which business you are in. For small businesses, yes most of the time you will rely on yourself. But for anything bigger, it is extremely important to delegate. In the begining, that pasta maker had to rely only on himself, but later, im sure he hired dependable people to work for him. I guess it really depends on what stage of growth your business is in, as well as how big you start it as.
Jun 27, 2013 5:19am
Loved this article! Cashflow is absolutely #1, I agree. I'm in the processes of writing an article that expands on that topic. Hope you can check it out. I'll see if I can link up with yours. I've known far too many businesses that get caught up in #2. Getting so excited about your business that you think you can run it on enthusiasm and gut instinct instead of cold, hard facts as discussed in #'s 3 and 4 is a sure plan for disaster. Passion in #5 will get you through the hard times, but it takes work, commitment, consistency and flexibility to plan based on the internal environment of the business that can be controlled and roll with the external environment that can't. Thanks for your article.
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