How to Prevent Small Business Failure

Carmen Diaz
Carmen Diaz

According to the Small Business Administration, roughly 20% of small businesses fail during the first year of operation. That’s a surprisingly low number considering the commonly held belief that most businesses fail within the first year. Longer term, half of small businesses survive for five years, and only one third ever celebrate their 10th anniversary. This may sound discouraging, but by identifying the causes of small business failure, adjustments can be made to increase the odds of success.

Why Small Businesses Fail

The 20% failure rate during the first year of operation is mostly attributed to under-capitalization. Small business owners frequently underestimate how much money will be needed to fund operation while they overestimate the revenues their products and services will generate. Entrepreneurs tend to be highly confident, and that confidence can lead to dangerous overconfidence. I have worked with small business owners who believed profoundly in their business and sales strategies and have seen how significantly mistaken some of them were.

Once a small business passes the first-year mark, the reason for failure is different.

At Nperspective, we are constantly astonished when we meet small business owners who seem to lack strategic financial knowledge. I recently visited the new owner of a company generating $2 million in revenues that has been operating for more than 30 years. He did not have – and didn’t realize he needed —

  • A reliable infrastructure or accounting model.
  • Knowledge of the basic operations of the business.
  • Financial statements and/or performance measures.
  • Business strategy/goals.
  • Internal controls.
  • A professional management team.
  • Finance professionals and the strategic process for small business.

As seasoned CFOs, we understand what small business owners need in order to be successful: a sustainable business model that allows them to make sensible business decisions.

Engaging with small business owners in the strategic process, we take on three roles:

  1. Mentors and Tutors – Ongoing mentoring and tutoring about how finance, accounting data and information can influence business decisions is essential to strategic finance. That includes ensuring that key concepts are understood by presenting them in a simple and concise way; demonstrating how they apply to decision making; listening to our client to understand how effectively we are communicating.
  2. Evaluators – The most important skill CFOs possess is the ability to evaluate a business. Because we have the expertise and knowledge to understand a company’s present situation and potential future, it is our responsibility to bring a keen and unbiased eye into the finances of the business and to work closely with the business owner to ensure that the present and possible future value of the business is presented fairly and clearly understood by the owner.

When evaluating and/or assessing a business, an opportunity or a threat, we use our institutional knowledge about ongoing changes in the legal and business environment, look at emerging trends relevant to the business, and consider possible opportunities to exploit. Ensuring that the evaluation is timely, ethical and unbiased by presenting the facts, possible outcomes and strategic alternatives is the key to our evaluator role.

  1. Implementers – CFOs have important capabilities that are integral in implementing and executing strategic change. A successful business is one that is ready and able to implement operational and business strategies. As experienced CFOs, we can guide the small business owner in the strategy implementation process by:
    • Using our experience to plan the proper implementation process
    • Ensuring that the implementation plan is nimble, coherent and can adapt to change
    • Being certain that all employees are fully engaged and committed and understand their role in the implementation plan’s success
    • Providing ongoing feedback, sharing successes and failures and listening to all those involved in the process.

If more small business owners understood the importance of strategic financial planning at every stage of their company’s life, there would be fewer business failures and more businesses capable of surviving external crises and continuing to thrive for many years.

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