Seven Tips to Prevent Business Failure

No matter where you live, one of the hardest aspects of setting up and operating a small business is accepting and understanding why so many small businesses fail in their first year of operation. Having been through the mill myself on more than one occasion, I understand how easy it is to blame a business failure on external causes – and how necessary but ego deflating it is to take off the rose colored glasses and accept a basic fact of being a small business entrepreneur – the buck stops here. 

Following a failure, many small business entrepreneurs take comfort in believing they did everything they could to avoid the company folding. They justify this by shouldering off the blame to staff, business partners, legal problems, etc. The list of excuses is almost endless - and the problem with all of these excuses is that if the entrepreneur really knew something was not right, it is their responsibility as a small business entrepreneur to identify causes – and put solutions in place. All too often the problem that causes a business to fail is an unknown underlying cause than was not sought out and fixed; put simply, “if you don’t know what’s wrong, you can’t fix it. 

Many times, failure to identify problems and/or failure to identify and act quickly to put solutions in place is due to lack of adequate forethought, planning, knowledge - and feedback. So, here are seven tips we hope will help you avoid business failure. 

1. Chose a business in which you have adequate knowledge and interest. Far too many people start a business without any real knowledge or any real interest in what running the business really involves (beyond the dream of making money). No matter what type of business it is, a bar, restaurant, hotel, call center or laundry, some specialist knowledge is needed. Lack of ‘trade’ knowledge is a quick way to failure. This is doubly so if you have no real interest in the service or product you sell. After all, how many people would eat at a restaurant when the chef doesn’t know how to cook properly or doesn’t really care what people think of it?

2. Make a realistic business plan. Always a part of any business set up requiring financing from a bank, the need for a business plan is often overlooked or ignored by entrepreneur when setting up a small, self financed business. This is a major mistake as taking the time to develop a business plan has a truly massive impact on your ability to identify possible problem areas in advance. This gives you the chance to change plans to avoid the problem altogether, or at least identify and implement solutions before you loose money.

3. Make sure you have the required start up cash and this includes having an adequate cash flow for at least the first six months of operation – including some emergency money set by. Lack of available cash is a common and serious business problem. Wherever possible, obtaining external cash in the form of loans or overdrafts should be avoided. Not only do these require paying out for interest charges, but you must also make monthly loan repayments that will reduce your available monthly cash – which can cause problems at the next bump in the road when you need another cash input.   

4. Avoid being arrogant and blinkered in your actions. On a number of occasions I have wanted something done simply because I liked the idea, and I stuck with that idea even to the extent of overruling staff who actually had more ‘sharp end’ customer knowledge than I did. While some ideas worked, most did not. While new ideas are always worth exploring, you must be able to accept that not everything you want to do is worthwhile, so plan and allow for some flexibility into every business decision you make - and be prepared to learn from your mistakes.

5. Makes sure you get what you pay for. Paying out too much, whether for facilities, equipment, or staff is a common cause of business failure. Always work to get the best deals possible and don’t be afraid to haggle over prices to ensure you get what you pay for. Since moving to live in the Philippines I’ve learned it is common for a small businesses to hire the owner’s relatives and friends. This is fine - just as long as the boss can enforce rules. The bottom line in these situations is that if you pay someone to perform a task for a period of time, you must have that task performed in return for paying salary. There is no place in business for allowing staff to cause disruption by taking extra time off or working poorly - and the owner doing nothing about it because it is a relative or friend they don’t wish to reprimand or terminate. Also, keep a close eye on expenditure and be prepared to act immediately if any costs seem awry for any reason. The quicker you find the cause of extra expenditure the quicker you can deal with it or find some way to work for less cost – and the less profit you loose.

6. Make sure potential customers know about the business. Too many small businesses treat advertising and marketing as a cost rather than the business investment it really is. Think about it for a minute; if you pay out $100 for advertising, and the advertising brings in even just $110 additional profit from new custom, you have actually ‘made’ 10% on your advertising investment.  

7. Manage the business. Running a business takes time and effort. No matter how good your staff are, how popular your product or service is, or how well things seem to be going, remember that you must keep on top of everything that is happening, because if things go wrong, excuses are meaningless. The buck stops with you.

One underlying rule of business that an entrepreneur must understand is the trinity – the three pillars of a successful business: If you have a good ‘product’ be it a service you provide or an item you sell, and this product meets customer’s needs or wants, and you can sell at a price that earns you sufficient profit, your business will be successful. If your business does not have all three parts of the trinity, it will fail.