Chapter 1: The Primary Reason Businesses Fail
Even though you may have been in business for years, there are some little known facts about succeeding and failing in business that you need to know.
Success rate; this fact will amaze you:
only 6.1% of small businesses fail to make it through the first year.
Despite all the myths and horror stories to the contrary, this small percentage means that most businesses survive the first year. They actually operate quite well for the most part and go on to last approximately three years.
It is the next three years that begin to separate the true successes from the failures. These next three years, from the third to the sixth, are where businesses run into rough terrain and failure can become a reality. If a business makes it to the ripe old age of ten, it falls into an elite group which is composed of only one in 25 businesses.
So what leads to these failures after the third year?
What are the basic reasons which cause so many businesses to falter, fail and close their doors? The answer to this question may surprise you… the essential blame for this failure can be placed squarely on the shoulders of the business owner; YOU!
That’s right, over ninety percent of small businesses fail because of the business owner or CEO!
Ninety percent! That is a phenomenal number that most business owners don’t ever know about, or even suspect. You might think that such a large percentage must be caused by a complex range of factors that are far beyond your control such as international competition, or industry slumps, and that they combine to unavoidably spell doom and destruction for business owners. I would like to be able to put your mind at ease and place the blame somewhere else, like an orphan on a doorstep, because no one wants to have such an overwhelming failure rate be their fault, but unfortunately I can’t. In all the years I have been in the business of helping businesses to become profitable, I have found this statistic to be true 98% of the time.
So, with a statistic this dramatic, the problems each owner faces must be varied and cover a wide spectrum of issues, right? You’d think that you must have to solve the problems of the world in order to bring this statistic down, or someone would have addressed it by now. Again, this is not true. The reason for the problem is simple and largely preventable.
The primary reason for this rate of failure is that 90% of small business owner’s, or CEO’s, simply lack the necessary skills and knowledge to succeed.
In fact, a whopping 70% of failures are due to the owner not recognising or even ignoring weaknesses in the business. This is further exacerbated by not seeking help and not taking action when new information becomes available about how things can be fixed.
You would think that these overwhelming statistics should be enough to strike terror into the heart of even the most independent minded business owner. These devastating numbers should quite reasonably send them running for assistance at the first sign of business adversity, but surprisingly, only five percent of business owners will even recognise that they have any issues and ask for help. That’s correct… only five out of every one hundred business owners will:
Realize they have a problem in their business.
Seek guidance on how to solve their problem.
Implement the solution.
This might be puzzling except when taken in light of basic human nature which was aptly summarized by one of the greatest students of human nature of all time, Dale Carnegie.
“…I personally had to blunder through this old world for a third of a century before it even began to dawn upon me that ninety-nine times out of a hundred, people don’t criticize themselves for anything, no matter how wrong it may be.” —Dale Carnegie
This means that often the minuses that you have previously attributed to your business are, on closer inspection, more likely to be problems arising with you as the owner or CEO. In addition, as the business owner, you remain your business’s biggest potential problem. Now I said potential problem because, once you recognise this fact, you can address the problem before it grows into something other than potential.
Now that you are armed with this knowledge, you are probably wondering what you can do about it, how can you foil the inevitable? If you have already suspected the truth and have made an effort to improve your business, you have probably investigated business improvement books, courses and programs. But, has this given you a solution? You were probably focusing on your business. The materials you were looking at or may have actually bought were probably all aimed at improving your business.
These business improvement systems usually start right off by focusing on your business and make recommendations for changes to your business. You can see my point here. You can make all the changes you want to your business, and this is a fine approach which we get to later, but again, this is not targeting the 90% statistical root of the problem, the business owner. Again, no one wants to admit that they are the cause of the problem, but until you do, or at least until you admit that you are potentially the source of future problems in your business, nothing will change. If you are sceptical of these statistics, or perhaps believe yourself infallible, and need further convincing, let me add my personal experience to the evidence.
In my work, I help businesses become more profitable, and I have found that every time I sit down with a client, either potential or actual, the discussion of their business always leads to the “a ha” moment of realisation. That’s because during our conversation, something I say strikes home and the owner immediately recognises a problem they either didn’t know existed, or had forgotten about. They can see the solution, how it can be implemented and the positive impact it will make in their business. The solution is something that was there all along, they just needed someone to help them direct their attention in a way that would bring the solution to the forefront of their thinking.
Recently I was sitting with a client who is a mortgage broker. This client was complaining about the amount of paperwork that they had to process before they could even begin visiting and assisting clients. The banks and aggregators “require” an ever increasing amount of paperwork and compliance documentation. My analysis immediately suggested a solution which focused on outsourcing these low-value tasks. As we worked through the steps required to process the papers – it became apparent to the broker that this was indeed mundane work and could easily be outsourced. Over the next two weeks, my client developed a description of the low-value tasks and offloaded it to an offshore outsourcing company. What used to take my client 3 hours each day is now accomplished, summarised and e-mailed to him. The net result is that my client can now concentrate on real paying clients, and there is a massive reduction in frustration, which has resulted in a much happier broker.
So did the broker know what needed to be done? Maybe – but it wasn’t until I spoke to him about the possibilities that it became apparent.
This is true for nearly every single business owner with whom I have conversations. They do not see or even recognize their own problems until I point out options and alternatives to their everyday business operations. I see the reality of this statistic over and over again and it is true for 98% of the business owners I encounter.
So, what accounts for this statistic? What happens in a business that is different after the first three years and why is it the owner’s fault? The answer is simple, it lies in the natural progression and growth of a business.
What generally happens is that a business goes through a number of relatively predictable phases. When you first enter into business, you are in the first phase: start up mode. Once through that, you move into the second, a growth phase, and then maybe into a rapid growth phase, and then a more mature phase. The chart shows these typical phases in the evolution of a business.
For the owner or the CEO, each of these phases has its own requirements, and the skills needed for the start up phase may not easily translate to other phases.
There are always exceptions, but as a general rule, a business fails because the CEO or the owner cannot carry the business between these phases. In moving from one phase to another, it is often the owner who cannot transition between phases and as a result becomes a detriment to the business and can even jeopardize the success of the business.
To meet these challenges and change yourself from a potential problem to a strong vital leader you need to know how to recognize these phase transitions. The technical term for these transitions is infection points, or junctures where the needs of your business drive it in a new direction. Let me give you an example, in the start up phase you are generally worried about revenue, cash flow and how to pay the bills. The skills required are those that keep expenses low and ensure that bills get paid.
In the next phases, you have enough revenue to cover your fixed expenses, and you are not worried about where the money is coming from on a month to month basis. Now, however, you need more staff. The skills you need are now more human asset management. You hire staff, and then you begin to have staffing problems. Once you’ve acquired the skills to handle that, you can then start to build the business momentum and take on more work. However, with more clients, you begin to run into customer support problems. Once you solve these, your business really takes off, which means more staff, and the managers to manage the staff. You can see that as you move from phase to phase, your skills as a CEO are continually evolving. What you do has changed completely, and maybe you are not so good now at what you do.
In addition, when you start your business, you are probably doing most of the work. In the next phase you are doing some of the work, but are beginning to hire other people to assume some of the workload. In the next stage, you have stepped away from the grunt work, but now you need to be a motivator to make sure that everybody stays on the same track. You must be the one with the vision and inspire others to support your vision
The range of skills necessary to transition a business through the various stages is daunting at the very least. How often have you heard, that an owner is a detail kind of person, or a people person, or a creative type. As a business owner, you learn the strengths and skills of your staff and you employ them as effectively as possible to maximize their efficiency. You don’t expect an employee who is a stickler for details to suddenly be able to ignore them. Yet, this is exactly what is expected of a business owner or CEO. The odds of a business owner being able to lead a business through all the phases is approximately thirty percent which means that about 70% of the time, according to the research studies, businesses will fail.
How often have you heard of companies that replace the CEO with a new person and suddenly the business sky-rockets? Within six to twelve months it is a completely different company. What happened is that the new CEO suits the new business phase in a way the old CEO could not, although he might have been excellent in the previous phases.
This can often be seen in the turn-around industry. The first thing that you generally do with an ailing company is replace the existing management team, the concept being that the team that got the business into trouble, is unlikely to be the same team that can get the business out.