The Five Disorders that Doom Small Businesses

“Many small businesses are doomed from day one, not from competition or the economy, but from the ignorance of their owners . . . their destiny is already decided because they have no idea how a business should be operated.” ~William Manchee, Author

Pretty strong words, but Manchee is right. He’s not saying business owners are dumb. He’s simply stating that no new owner can know everything about the skills, practices and strategies of running a successful small business.

Much has been written about small business failure. Some say seven of 10 survive at least two years, and 51 percent survive at least five years. Others say no: eight of 10 go out of business within their first 18 months.

The truth is, no one really knows.

The important point is how fragile a small business is in its early life, and how dangerous the first five to 10 years are in its quest for survival.

One sure way to increase the odds of success is to know what causes most small businesses to fail—or fall into soul-draining mediocrity. Fortunately, there is considerable research on this.

Here’s the good news. All the major disorders that kill most small businesses—in infancy, adolescence or maturity—are conditions of our own making. They are internal issues, fully within our power to periodically check, avoid and, if need be, remedy!

The Five Major Disorders that Maim or Kill Small Businesses

Inadequate or non-existent business planning

Most new business owners don’t know how to do business planning. But this is a skill you can learn.

70% of the value of planning lies in the thinking, discussion, analysis and problem solving in the process. It forces you to examine the near-term future and goals of your business based on your current situation. This takes you away from focusing exclusively on the day-to-day operation and gives you a clear direction to navigate.

If you don’t know how to conduct a meaningful business planning process, get help from a business consultant, experienced advisor, local small business help organization (such as SCORE) or books. It’s not as hard as you might think, but it’s crucial. Failing to plan is planning to fail.

Not enough financial capital

Some businesses require very little start-up capital while others need much more. It’s vital to know how much your business needs—until it reaches self-sustaining cash flow and profitability.

For a new business: have an accountant or financial advisor work up a pro forma financial projection for the first two to three years of active operations. That gives you a realistic picture of how much capital you’ll need, when and for what reasons, and for how long.

For an established business, capital is required for cash cushioning and smoothing the inevitable lean periods. Cash really is king! There is no business without it.

You must never take your eye off this vital function. It’s not a do-it-yourself, every once in a while project.

Poor financial controls, records and money management

Knowing your physical numbers—such as blood pressure and cholesterol—is critical to your personal health. Knowing the financial performance and controls of your business is exactly the same thing for your company. If you don’t record, review and interpret your business’ numbers, you cannot manage it. It’s that simple and vital.

Don’t assume that your outside accountant or CPA is handling this. Outside accountants are primarily specialists in taxes, ensuring you pay what’s legally owed and nothing more.

Financial and money management is the chief financial officer’s (CFO) job. Until you can afford one, it’s your job. Don’t guess how to do it. But don’t think you need an accounting degree either. Get the help you need to make sure this important job is done right.

Poor or dysfunctional management

No business owner is good at everything in the company. Yet, some won’t admit they don’t know it all and can’t get out of their own way in running and managing the business. They insist on doing it their way or the highway. This may lead to operating inefficiencies and incompetent practices—and repeating the same management mistakes.

A study concluded that 94% of all small business failures could be traced to incompetent or dysfunctional management practices by leaders. Often the demise of an otherwise successful business comes from poor decision-making and weak, ineffective leadership.

Unable to build a sustainable business model

After successfully passing through the start-up phase, owners must build and grow a business model that is repeatable, with a predictable, profitable revenue stream.

There must be sufficient demand for the company’s products and services that can be satisfied at a profitable price. Many small businesses have relatively early success, only to founder because they don’t have a repeatable model that allows them to grow and thrive.

Use this Tool to Guard Against These Disorders

It makes sense to regularly check your business to see if one or more of these five killers are there. An annual business planning process for the coming year usually is a good time for this appraisal.

Start with this simple diagnostic tool. Use a 1-to-7 scale, where 7 is strongly present and 1 is not there at all.

Evaluate each area separately and independently. What you want is independent evaluations and assessments that indicate if any of the disorders have crept into your company’s daily life.

A combined average score of five means it’s likely none of the disorders are present. A score of 35 means your company probably is in imminent danger. Scores between those two poles will show you where you need to take corrective action.

Be vigilant in guarding your business’ health and well-being. Don’t take it for granted.

Key Points

  1. It’s smart to know what causes most small businesses to fail. Use that knowledge to guide your management decisions and actions.
  2. Small businesses can be remarkably resilient. But they are also fragile and susceptible to various life-threatening conditions and disorders.
  3. You need to do a regular, objective evaluation to assess whether any of the five crippling disorders have worked their way into your business.
  4. Use the Evaluation and Diagnostic Tool to guide you and other independent evaluators in this process.