Why Small Businesses Fail

 

As we’ve learned throughout the pandemic, the small business failure rate has increased dramatically. And yet, even in the most challenging industries such as consumer-related companies, while many have failed others have adapted and even thrived.

Revitalization Partners over the last eighteen years has worked with many distressed companies. As we begin to become involved with a company, one of the first questions we ask the owner or entrepreneur is:

What do you believe happened?

The responses are often very different from the reality that we discover as we get further into our understanding of the company. The observations of the owners are frequently very off point, which makes sense if you think about it.

If the owners knew what they were doing wrong, they might have been able to fix the problems. Often, it’s simply a matter of denial or not knowing what you don’t know. So, let’s look at some of the reasons small businesses fail.

 

THE MATH DOESN’T WORK …

Sometimes the math just doesn’t work. There is not enough demand for the product or service at a price that will produce a profit for the company.

This happened to a lot of companies during the pandemic where the customers could not or would not materialize. Many of these companies are still going, kept alive by PPP loans or other government programs.

But these programs will come to an end and if the company was beginning to see revenue and profit declines pre-pandemic, management has to question the viability of the company when the government aid ends.

 

WHO IS AT FAULT?

Another problem we see are owners that can’t get out of their own way. They may be stubborn, risk averse, or conflict averse – meaning that they need to be liked by everyone.

They can be perfectionist, paranoid, or insecure. But in most cases, the owner tends to blame the bank, government, the idiot partner, anyone but themselves.

Even when we explain the problem, they may even recognize that we’re correct, yet continue to make the same mistakes until the company fails.

 

DON’T KNOW THE NUMBERS …

One of the most common reasons for business failures is poor accounting or computer systems. You simply cannot be in control of a business if you don’t know what’s going on.

With bad numbers, or even worse, no numbers, a company is flying blind. It happens all the time. It is a common and disastrous misconception that an outside accounting firm, hired to do the taxes, will also take responsibility for the financial condition of the company.

In reality, that’s the job of the owner and/or the management of the company. Revitalization Partners recently had a receivership case where the owner did not even know which receivables were due and which had been paid.

Most of the “receivables” that were being used as collateral for a bank loan were non-existent, having been paid long ago.

 

NO CASH CUSHION …

Another reason for a business failure is the lack of a cash cushion. It is often said that “cash is king.”

It’s especially true that business is cyclical, and problems can and will occur. Some of our clients have experienced the loss of a key customer, loss of critical employees, lawsuits, and now a pandemic. If a company is out of cash, or more importantly, maxed out on it credit line borrowing capacity, it may not be able to recover.

We have never met a business owner or entrepreneur who has described their business as mediocre. And yet every business can’t be above average.

This mediocracy often applies to operational inefficiencies and sometimes dysfunctional management. The inefficiencies often include paying too much for rent, labor and materials. Or not having a marketing or sales plan.

We often hear from managers and owners that “If only that next big order will come in” or “if only we could reduce our product cost to X then everything will be fine”. The dysfunctional management team believes that, yet it is not true and has never been true.

 

IT TAKES COURAGE TO ASK FOR …

The saddest reason for business failures is a successful business that is destroyed by its own success and over-expansion.

This includes experiencing growing pains that damage the business, borrowing too much money in an attempt to keep growing at a particular rate, or moving into new markets that are not fully understood and may not be as profitable. It is true that sometimes less really is more.

It is said that it takes courage to ask for help. If you are a business owner or entrepreneur that sees, even the beginning of some of the problems outlined, ask for help early. While you are seeing your own business, those of us in the restructuring business have seen and helped many businesses with similar difficulties. While we can’t speak for everyone in the business, at Revitalization Partners …

… it costs nothing to have a discussion.

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.