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Reasons Small Companies Fail

“Small business failure.” This short phrase of just three words carries enormous emotional impact and meaning.

According to the Small Business Administration (SBA), only 50% of companies survive at least 5 years and only 33% survive at least 10 years.

These are daunting odds for any small business owner or startup founder. In our experience providing outsourced CFO services in the San Francisco Bay Area and in Silicon Valley, the mantra “Grow Fast, Fail Fast” has taken hold. Unfortunately, the failure rates are probably even higher than the rest of the country due to this mentality.

What can a small company or startup do to improve the odds of success? A recent article called “10 Reasons Small Companies Fail” lists some common reasons for failure.

Here is a summary of some of the more prominent things to avoid:

  • “Insufficient Capital”

“Starting a business without sufficient operating capital is almost certainly a death-knell. Not only that but many new business owners underestimate the perils of riding the cash flow roller coaster. In fact, according to Hiscox’s 2015 DNA of an EntrepreneurReport, 21 percent of US entrepreneurs have resorted to using their credit cards to fund their businesses.”

Far too many entrepreneurs and business owners underestimate how much startup capital is required before their new business venture turns profitable and starts generating cash flow. The classic example is a new restaurant which sinks its limited startup capital into retrofitting a space over a period of months just to get the place open and then have no plan on how to survive the initial period of months of negative cash flow after opening. This is also equally true with companies in the manufacturing and technology industries.

  • “Improper Planning”

“Lack of proper planning is another common reason small companies fail and go out of business. All too often, entrepreneurs focused on achieving their dream of financial independence fail to take the painstaking but necessary step of creating a strategic business plan that factors in components such as workforce needs, analysis of competitors, sales and expense forecasts and marketing budgets.”

The cliché is true: “People don’t plan to fail, but they often fail to plan.” Entrepreneurs are often strong-willed, emotional personalities and make crucial decisions quickly. However, the reality of the financial complexities related to managing sales, costs, profits, and cash flow for a startup or new business is not something that can be done

  • “Expanding Too Quickly”

“More than one company has experienced bankruptcy as a result of the business owner’s reach exceeding his grasp concerning expansion.”

Too few business owners and startup founders understand the perils of growing too fast. Growing quickly puts a huge strain on cash flow due to hiring costs, operating losses, working capital needs, and capex. Even when sales are increasing rapidly, many companies fail due to the inability to manage the cash flow and financial stresses.

  • “Unprofitable Business Model”

The popular phrase “Business Model” is often abused and misunderstood. One of the first tasks we face as an incoming CFO is to educate the business owner, Founder, and management team on what a true Business Model is. Usually, this involves carefully analyzing the key drivers of sales, costs, financial ratios, profit margins, and other items.

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