While small businesses benefit the economy by creating new jobs, new industries, and various innovations, small businesses are much more likely to fail than large businesses, especially during economic downturns. Why? Because of management shortcomings, inadequate financing, and difficulty dealing with government regulations. These issues—quality and depth of management, availability of financing, and ability to wade through government rules and requirements—are so important that small businesses with major deficiencies in one or more of these areas may find themselves in bankruptcy proceedings. -------------------------------------------------
Almost one new business in three will permanently close within two years of opening, half will close within four years, and 62 percent will fail within the first six years of operation. By the tenth year, 82 of every 100 businesses will have failed. Although highly motivated and well-trained business owner-managers can overcome these potential problems, they should thoroughly analyze whether one or more of these problems may threaten the business before deciding to launch a new company. Management Shortcomings
Among the most common causes of a small-business failure is inadequate management. Business founders often possess great strengths in specific areas such as marketing or interpersonal relations, but they may suffer from hopeless deficiencies in others such as finance, or order fulfillment. Large firms recruit specialists trained to manage individual functions; small businesses frequently rely on small staffs who must be adept at a variety of skills. Owners of small service businesses find that they must concentrate on their most profitable customers and even “fire” customers who don’t contribute to the bottom line, as the “Business Etiquette” feature discusses. An even worse result occurs when people go into business with little, if any, business training. Some new businesses are begun almost entirely on the basis of what seems like a great idea for a new product. Managers assume that they will acquire needed business expertise on the job. All too often, the result is business bankruptcy.
If you are contemplating starting a new business, consider the following warnings. First, learn the basics of business. Second, recognize your own limitations. Although most small-business owners recognize the need to seek out the specialized skills of accountants and attorneys for financial and legal assistance, they often hesitate to turn to consultants and advisors for assistance in areas such as marketing, where they may lack knowledge or experience. -------------------------------------------------
Founders of new businesses are typically excited about the potential of newly designed products, so they may neglect important details such as marketing research to determine whether potential customers share their excitement. Individuals considering launching a new business should first determine whether the proposed product meets the needs of a large enough market and whether they can convince the public of its superiority over competing offerings.
Another leading cause of small-business problems is inadequate financing. First-time business owners often assume that their firms will generate enough funds from the first month’s sales to finance continuing operations. Building a business takes time, though. Employees must be trained, equipment purchased, deposits paid for rent and utilities, and marketing dollars spent to inform potential customers about eh new firm and its product offerings. Even a one-person, home-based business has start-up expenses—such as a new computer or additional phone lines. Unless the owner has set aside enough funds to cover cash shortfalls during the first several months while the business is being established, the venture may collapse at an early...