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Business Insights from Andrea Hill

Some concepts and statistics to consider if you are thinking about starting a business.

Why Businesses Fail

Originally Published: 27 July 2007
Last Updated: 31 October 2020


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CNN Money offers a quiz entitled "Are You Ready to Start Your Own Business?"  I found it while skimming the small business news this morning, and decided I should take it.  After all - it's been 15 years since I last owned my own business - 15 years doing the corporate thing - and now I'm on my own again. What if I'm really not ready? What if I've gotten soft while surrounded with hundreds of people doing work that, in a very small business, I have to remember how to do for myself?

So I took the quiz, got a 90% (hmm), and most important, found it to be an excellent refresher in 10 very important concepts which, while necessary for any businessperson, are particularly crucial for those of us who are going it on our own.

The statistics for new business success aren't pretty.  For many years it was reported that approximately 80% of new businesses failed in the first 5 years.  The numbers may be looking a little better now - the Small Business Administration (SBA) recently reported that "two-thirds of new employer establishments survive at least two years, and 44% survive at least four years." An article by Patricia Schaefer, called "The Seven Pitfalls of Business Failure and How to Avoid Them," gives good insight into the reasons for these statistics.

According to Schaefer, small businesses fail due to: 1- starting a business for the wrong reasons, 2 - poor management, 3 - insufficient capital, 4 - location, location, location, 5 - lack of planning, 6 - overexpansion, 7 - no website.   Funny.  Except for the seventh point, those are the reasons that any business - large or small - has failed in the history of business.

I've spent a lot of my years developing executive talent in corporations. The individuals with the greatest potential for success had innate qualities of strong intelligence, critical thinking skills (or the willingness to develop them), and excellent people skills. Without these three things, the rest doesn't matter. In addition, they all had well-rounded business skills, which correlate well to the first six points in the "why businesses fail" list. Whether they were working in a specific functional division or were performing at a general management or global level, the skills of understanding why a business exists (business proposition and strategy), the functions of management (planning, organizing, controlling and leading), financial management, and sales and marketing (location, location, location) are critical to individual executive success as much as they are critical to the ability to start a successful small business.

In a small business its tempting to get so focused on one thing - a website, a specific customer, a project - that one forgets that all the functions of management have to be tended to at all times. In a large business the same risk exists. The solution to the risk for large or small business is surprisingly similar. Systems have to be designed to ensure all the elements of the business are served at the right time and by the right people.

In a small business, that system is designed to enable one person to attend to the needs of the business and to know when to hire outside help (unless you are an accountant, an accountant is absolutely the first help any small business should retain). In a large business, the system is designed to help dozens or hundreds of people serve the businesses requirements effectively. And knowing when to shift from the small business approach (I have to do it myself) to the large business approach (I am not micro-managing others who have to do the work) means at some point the ownership/management was smart enough to start developing the people who would eventually do the work.

Business disciplines scale. The systems that support them change dramatically, but the underlying elements are all the same. And they're not that hard to learn, which is good, because they must be learned.  My oldest child is studying to be a pharmacist. She pointed out to me not long ago that the difference between her career and my career is that if I make a mistake, nobody dies.  And she's absolutely right.  The skills I honed as a CEO of a mid-sized corporation are the same skills I need for running a small business. The skills a professional climbing the corporate ladder needs are the same skills as an independent entrepreneur. 

Now I just need to figure out how to get our 5-year-old to manage my website.

(c) Andrea M. Hill, 2007