The Ultimate Reason for Small Business Failures

Today’s topic is all about small business failure and what to do about it. 

For the last six-plus months, I have been secretly and quietly researching small business failure for a few reasons. Selfishly speaking, I’m working on my next book and it’s largely about small business failure and what to do about it.

But, the other end of the stick is that in a couple of months, maybe two months, I’ll have all of my materials submitted for my masters and this is actually my thesis dissertation — all about small business failure. 

What’s been interesting in talking to entrepreneurs of all different shapes and sizes, is that there are a lot of shared reasons why they “feel” they went out of business. Between these interviews I took, I started to summarize the findings. While on the flip side, I also studied small business failure in literature, journal articles, sources like Forbes and Entrepreneur Magazine, all the different articles that talk about small business failure. And while there was a lot of crossover between the two lists, there really were some pretty big differences between why the entrepreneurs said and feel that they failed than what was written in the literature, for lack of a better phrase. 

However, the number one reason that was the most obvious was they ran out of cash. These entrepreneurs simply either were not making enough cash in order to keep the business afloat or they didn’t have enough cash to pay themselves. So they decided that going towards the route of having a job or something like that was a better option. Or, a lot of these entrepreneurs were simply underfunded from day one. Cash ultimately was the number one reason why they ended up going out of business. 

What was interesting in talking with these entrepreneurs is that more of the other answers were not necessarily textbook answers. So while again, the number one reason was cash, a lot of the other reasons that they talked about were life events or extenuating circumstances. 

While most of these interviews were done pre-COVID, I did end up conducting a couple of interviews, obviously, during and/or post-COVID. A lot of those entrepreneurs are now saying that COVID put them out of business. And while I wouldn’t fully disagree, the challenge is that if a situation like that and other entrepreneurs talked about divorce, issues with their partner or their employee — there were a lot of different things that they talked about — but, at the end of the day, there were really a couple of things that were the most common. And again, cash was one, these extenuating circumstances was another. The final one that surprisingly, none of the entrepreneurs blamed as the reason that they failed, but everywhere in the literature talked about this as really being the number one reason was planning. And when I look at and analyze these different businesses, and when they started to be able to kind of look inward and look at the past so they’re able to kind of reflect on what happened when they started to think about things, they still said that cash was the number one reason why they went out of business. However, they also started about things like planning and marketing. 

Basically, the hypothesis of this entire paper as if they had done more marketing, and more by way of investing, taking it more seriously, and trying more marketing, would that have saved their business? Yes or no? And in a lot of the answers, it would really be yes, but for most of them, it really was dependent.

So it was dependent on the fact that if they walked into a business or if they were growing a business, and they didn’t have any kind of plan, it was going to be pretty darn challenging to succeed. If you have absolutely no clue on where you want to head or clueless on your day to day numbers, what is your cash flow looking like, how many leads are coming in, what is your profitability on your product, or how much money are you making per hour on each team member (if you are in a service business) — if you don’t have an adequate plan and a way to continuously track the numbers, more marketing would not save the business. The goal with more marketing is to fill your funnel. 

So ultimately, when these businesses said they went out of business because of lack of cash, if they had more customers, those more customers would have created more cash. I do believe that many of them could have been saved. But I don’t believe that most would have been saved without an adequate plan. So if I look at what is the number one suggestion that I would give for you today, what is that number one action step? It would be that you need to start to put together a backward plan. Whether you want to put a backward plan in place that looks out three months, six months, one month, or a year — whatever makes strategic sense for you and your business, you want to start looking out to see where do you want your business to be? 

Let’s just call it 30 days from now, for example. Where are things going to be 30 days from where they are today? I’ll do the simple math — if you are doing $10,000 a month right now, and in order to get the path to profitability, you need to be at $15,000 a month, what are then the activities that you’re going to do? If you’re looking 30 days out from today, what are those activities that are then going to drive the results? Usually, they’re going to be marketing-related activities. You’re going to do an email blast, webinar, joint ventures, some paid traffic, more Facebook posting, or maybe you’re going to go live and do some content. What are those different activities? Everything starts with looking at where you are today, and where you want to head and then backing into those numbers. Because that is the area for whatever reason, most entrepreneurs skip in their planning process.

And I will admit, I’ve done that many, many times myself. We are getting ready to tackle the month and we have all these different activities. And I realized that they were not necessarily backing into the numbers that we wanted to hit 30 days from now. 

So we listed out all over activities — we’re going to do a webinar, a couple of email blasts, Facebook Lives every Thursday — all the different activities, but I didn’t back them out of a goal of “Okay, great. We want to add $10,000 a month of reoccurring.” for example. 

So, step one is to look at where you are today. Where do you want to go? Again, 30 days, 60 days, I mean, it really depends on the type of business that you’re in and the type of swings and things like that that you’re going to see. However, you got to get that plan in place and that plan then will start to guide your activities, your activities then will be correlated back to increases and leads and phone calls. And if they’re not, then it’s about time that you’ve got to look at really changing up your activities

But that is where I want you to focus today — backward plan from where you are today to where you want to go in three months, six months, a year, one month, whatever that timeframe is. Get out there and get your backward plan ready to go.

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