6 Critical Mistakes Made By Most Small & Medium Sized Businesses [SMBs]

What Causes SMBs to Fail?


Regardless of the industry, failure is the result of either the lack of management skills or lack of proper capitalization… or both.

Six of the Most Common Causes of Failure:

  1. Failure to clearly define and understand your market and Customers' buying habits.

  2. Tolerating inadequate management.

  3. Unchecked growth.

  4. Believing you can do everything yourself.

  5. Failure to adequately anticipate cash flow.

  6. Inadequate cash reserves.

The Six Defined:

  1. Failure to clearly define and understand your market, your customers, and your customers' buying habits.

    • Here’s the key question”Who are your customers?”

      • You should be able to clearly identify them.

      • How are you going to reach them?

      • Is it a product or service?

      • How loyal are your Customers?

      • Do customers come back?

      • Are your customers more driven by Quality, Delivery, Price, other?

  2. Tolerating inadequate management. A common problem faced by many companies is growing beyond management resources or skills. As the company grows, you may surpass certain individuals' ability to manage and plan. If a change becomes necessary, don't compromise to fill the positions or to accommodate someone within your organization. Determine the skills necessary for the position and insist the individual has them. In the short-term, consider hiring Subject Matter Experts [SME]. This provides the business opportunities to benefit from a short-term alliance, to gain long-term advantage...without committing to legacy costs associated with full-time hires.

  3. Unchecked growth. Slow, steady, planned growth wins. Dependable, predictable growth is vastly superior to spurts and jumps in volume. It's hard to believe that too much business can destroy you, but the textbooks are full of case studies. Going after all the business you can get drains your cash and actually reduces overall profitability. You may incur significant up-front costs to finance large inventories to meet new customer demand. Don't leverage yourself so far that if the economy stumbles, you'll be unable to pay back your loans. When you go after it all, you usually become less selective about customers and products, both of which drain profits from your company.

  4. Believing you can do everything yourself. One of the biggest challenges for entrepreneurs is to share the lead. The attitude that you must have hands-on control of all aspects of your business is detrimental. Allowing shared-control will allow leadership to concentrate on the most important problems or issues facing the company. Letting others help out is a big step for most. This can be taken on in small steps, through temporary hiring of SMEs, for the same benefits noted above.  

  5. Failure to adequately anticipate cash flow. Accounts payable and accounts receivable create a two-way dynamic that it unanticipated by many new businesses. This tug-o-war at your cash can pull you down if you fail to plan for it. In short, many start-ups have their Financials managed by the same person or outfit that was with them since day one.  Just like the issues noted with Tolerating Inadequate Management, not recognizing the limitations of your financial department may cause the death of the company. In this scenario, a short-term SME may be exactly what is called for to evaluate the situation.

  6. Inadequate cash reserves. If you don't have enough cash to carry you through the first six months or so before the business starts making money, your prospects for failure are high.  Most owners don’t consider both business and personal living expenses when determining how much cash you will need. Again, this is usually due to a lack of expertise in the area of Finance.

Subsequently, it’s the “Leader’s Attitude”; their ability to be objective, their willingness to bring in needed help, their openness to share power are all crucial to success.

Most startups make the mistake of being “love blind” with their product or service. Unfortunately, it is this lack of self-reflection or self-criticism that causes many companies, startups and their mature companies alike, to fail.


3 primary reasons for failure of startups within three years is usually:

  1. Management's failure to Plan

  2. Management's failure to Act

  3. Management's failure to React.

5 secondary reasons why businesses fail in their early years include:

  1. Poor business location

  2. Poor customer service

  3. Unqualified/untrained employees

  4. Lack of a proper business plan

  5. Failure to seek outside professional advice.

While poor management is primarily cited as the reason SMBs fail, inadequate or poorly timed financing is a close second.

When starting or expanding a SMB, sufficient available capital is essential.

In addition to sufficient financing; knowledge and planning are required to manage it well.

These are the Big 3, common mistakes to avoid:

  1. Securing the wrong type of financing

  2. Miscalculating the amount required

  3. Underestimating the cost of borrowing money.

 

Solutions to Mitigate these Mistakes

  • Have a Business Plan

  • Ensure the Business Plan addresses Customer, Core Business, and Growth

  • Know Your Limitations
  • Be ready and willing to ask for help, even if that means going outside in the short-term
  • Realize the Limitations of your Team
  • Assure you have a competent leadership team, to support the current state of the business
  • Understand your Finances
  • Make sure decisions consider financial impact, short-term, long-term, and protect cashflow

If your company is in need of a SME for any of the areas discussed in this article, don’t hesitate to contact our team at the Business Brain.  We have support personnel for every segment of business, and we specialize in the diagnosing, prescribing, and rehabilitation of challenged SMB’s.  We can also assist in the financing, with favorable rates and terms.

 

Kurt Zimmerman - Executive Vice President

The Business Brain

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