It’s no secret that most businesses fail. By most measures, somewhere upward of 80% of small businesses and startups fail in their first few years of operation. What is less clear is why and how those small businesses fail.
Most small business failures are long in the making rather than overnight catastrophes. Experienced entrepreneurs will recognize the causes of and reasons for failure and take proactive and reactive actions to remediate those risks. Less experienced small business owners, on the other hand, won’t realize what hit them, even after the failure occurs.
There are several key early warning signs that, when properly remediated, can proactively provide a small business owner guidance on how to avoid small business failure and instead achieve small business growth. Here are three of the most common ones:
1. Not enough cash to cover your liabilities. Sources such as the Small Business Administration often point to “running out of cash” as a primary and common source of small business failure. Small businesses don’t just simply run out of cash, though. Instead, they fail to manage their cash and cost in a way that makes them healthy. Successful small business owners recognize that small business loans and “more cash” is not always the answer, but effectively ensuring that there is enough cash in the business at all times to cover costs and liabilities is a surefire way to avoid the financial challenges that most small businesses face.
2. Disorganized and reactive small business operations. Once a small business grows beyond the capabilities of its founder and owner, there is often a need to hire employees or contractors to help manage the business. With employees comes a higher risk of communication breakdowns, inconsistent ways of conducting business, and less effective results. If you find yourself in a state of constant chaos and disorganization – which many fledgling small businesses do – then it may be time to standardize and clearly document your operational standards so that employees, contractors, and others involved with your enterprise perform business processes your way instead of randomly selected ways of doing things.
3. An underperforming small business strategy or business model. It’s rare for entrepreneurs to hit a home run with their product, service, or business model on the first try. The successful ones recognize when things are or aren’t working and make adjustments accordingly. This is often referred to as a “pivot” among entrepreneur and startup circles. The most effective way to manage the pivot process is to examine and measure every major component of your business strategy, ranging from prospective customers’ reactions to your marketing calls to action, customers’ propensity to buy your product, overall small business profitability, and other key measures of small business success. When analyzing trends, it is important to tweak your product offering and business model based on results, if and where necessary.
While there are several other early warning signs that can indicate a potential small business failure, these are the most common and important ones. Just as importantly, these are the ones that the average entrepreneur and small business owner can easily recognize and remediate before it’s too late.