Why Small Businesses Go Bankrupt and How to Avoid It

By Randall Orser | Small Business

Debt Word And 3d Character Shows Bankruptcy And Poverty TNStatistics are regularly released that say something to this effect: “85% of new businesses fail in the first five years”. The message is clear. If you start a small business there is a high probability that you will fail. You would think that this would send the smart money straight to the Help Wanted ads but what about the businesses that succeed? What made them different? What secret did they know that lead them down the path to prosperity? Here is what you need to know to be one of the winners.

Lets look at a scenario. Andre is a baker. Not just any baker. When anyone who has eaten Andre’s baking hears mention of it they start to salivate like Pavlov’s dogs. One day Andre’s grandmother passes away and leaves him a modest inheritance. His time has come. He takes his money and starts his dream business. Five years later the inheritance is gone and Andre is back working for his old boss. What happened?

Andre had spent all his time learning about his passion, which was baking. In order to succeed he needed to know an equal or greater amount about business. For every cookbook he read he needed to read a book on business. For every cooking class he attended he needed to attend a course on business. Andre didn’t know the difference between a Monthly Bank Statement and a Cash Flow Forecast. He had heaps of Specialty Knowledge and almost no Business Knowledge.

So the first step to succeeding in business is to learn about business. Sounds simple doesn’t it. It is but it is a sad fact that most people will only figure this out after it is too late and maybe not even then. Here are some things you can do to give yourself a huge edge and increase your likelihood of success.

  • Sign up for some courses in small business at your local college or university. Maybe even start working on a degree in business. Be aware that there are now programs aimed at learning to be an Entrepreneur, which differ somewhat from a typical business degree designed to send you into the corporate world.
  • Start networking. Meet successful business people. You will find them at your local Chamber of Commerce, at work in their business and as members of clubs such as Toastmasters.
  • Read books on business. The libraries and bookstores are filled with them. Read reviews to find some of the most recommended titles and take notes when you read them.
  • Make use of the excellent resources online. The United States Small Business Administration website is just one example of a tremendous (and free) resource on starting a small business.

Entrepreneurs are known for taking risks but the reality is that the skilled entrepreneur takes risks that are calculated and based on knowledge and experience, which is available to anyone who will go looking for it.

One west coast entrepreneur has owned a jewelry store, a pub, a community centre, a restaurant and a music store. Each one was a success and was ultimately sold as a profitable business. The key elements of his success were his solid business fundamentals.

Some things you need to know before you start leasing space, hiring staff or buying equipment include:

  • A sound understanding of Business Plans and which one you need (and you absolutely do need one).
  • The basics of marketing, who your customers are and how to reach them with your message.
  • What is your USP (Unique Selling Proposition) and how this differentiates you from your competition. Why would your potential customers choose you over them?
  • What are the important numbers that you need to know and monitor to measure the health of your venture.
  • What is Cash Flow, how does it differ from Monthly Sales, what potential Cash Flow pitfalls effect your business model and how can you protect against them.
  • Who are your competition and what are their strengths and weaknesses.

Taking the time to gain a solid business education to supplement your Specialty Knowledge is the key to surviving your new business venture. It is what separates the winners from the losers. Reading this article is a sign that you are on the right track. Use the list given above as a starting point as you build a framework of required business knowledge and continue to fill your areas of weakness until you are strong and prepared to enter the arena. Do this and you will enhance your potential for success and give yourself the edge you need to achieve your dreams.

About the Author

Bookkeeper Extraordinaire
Number Crunchers® Financial Services

Learn how to just say stuff it to this bookkeeping thing with our ‘Just Say: “Stuff It” To Bookkeeping program.