Newspaper Articles on Entrepreneurship

Each month, IECE Director Mike Stull contributes a feature column on entrepreneurship. Here's the latest:

Reasons for business failure, part 2

In the last installment of this column I examined the reasons why so many promising small businesses fail within the first five years of operation. The first two reasons I discussed - undercapitalization and lack of knowledge/business experience – are just the tip of the iceberg. My experience in working closely with small business owners suggest there are other equally compelling reasons for failure:

Lack of planning. While writing a business plan prior to opening a business doesn’t ensure success, it does force a business owner to confront key aspects of the business opportunity and operation. Thinking through concepts such as the company’s marketing, sales, pricing, and financial strategy can give the owner a better sense of how to guide the company and how to adapt when things don’t go as planned (which happens often). A company I consulted with many years ago had some initial success selling its product. However it soon became clear that the company wasn’t making a profit. The culprit was their pricing – they spent very little time in the planning stage with regard to pricing their product. Despite strong sales they were actually losing money on each item.

Putting all your eggs in one basket. Often small companies will start out by selling primarily to one or a small number of customers. While having a large customer that continually buys your product or service is great – what happens if they stop or reduce their buying? A company I interviewed recently faced that very scenario – in their first year of operation the entire sales revenue came from one large retailer. While they loved the ongoing revenue, they soon realized that if they lost the customer they would have to scramble to keep the business going. So ingrained was this experience that to this day the company refuses to let any one customer account for more than 10% of its business.

Growth. Many a business has collapsed because of rapid expansion. While growth is something to strive for, business owners must be prepared to grow. This includes having adequate capital to finance expansion and having systems and processes in place that will handle the growth. In particular capital is critical – a company that sees its production volume jump dramatically often has to buy more raw materials and hire more employees – all of which require cash. Many companies become starved for cash because the increased demands that growth places on the company.

Poor record keeping and financial controls. A company I consulted for in the late 90’s had immediate success – sales in excess of million in their first 8 months of business. The problem – they were cash starved because of poor financial controls. Despite strong sales, they didn’t stay on top of getting customers to pay. As a result, they had some customers that hadn’t paid their bill in over four months. To make matters worse, they were continuing to sell product to customers with unpaid invoices.

There are myriad reasons why small companies fail. If you are an aspiring or existing small business owner, I hope you take heed of the factors that can negatively impact your business.