Monday, December 28, 2009

Ten Reasons Why Small Businesses Fail

January 1st is just around the corner. It's time to evaluate the health of your business. Not just its pulse, which is one factor, but a serious look at the key things that make a business go.

If you've heard me speak in the last five years, you know that I beat people over the head with Michael Gerber's book The E-Myth Revisited. Here's a little bit of what I tell folks about this book:

- If I could make every business owner in the world read one book, this would be it.

- I recommend that you re-read this book every year.

Gerber spends a lot of time looking at what makes businesses successful - and unsuccessful. And he comes up with some great rules for organizing and systematizing your business. He also comes up with ten major reasons why Small Businesses fail.

Take some time and consider - honestly - how your business stacks up as the New Year begins.

Gerber's Ten Reasons Why Small Businesses Fail

1. Lack of management systems, such as financial controls.

2. Lack of vision or purpose by principals.

3. Lack of financial planning and review.

4. Over dependence on specific individuals in the business.

5. Poor marketing strategy.

6. Failure to establish or communicate company goals.

7. Competition and/or lack of market knowledge.

8. Inadequate capitalization.

9. Absence of standards for quality and performance.

10. Owners concentrate on the technical rather than the strategic.

Most people focus on #10 when they discuss Gerber's books. And that's totally fair. After all, one of his fundamental arguments is that people start businesses based on their skills. They are essentially technicians and not business people. Of course they find themselves as technicians running a business.

That's how I got started. That's basically how we all got started.

But as I review this list I can't ignore the first nine items. As I travel around and talk to consultants of all sizes, I find that most small businesses have most of these problems! To some extent you might expect that with new businesses or extremely small (1-3 person) shops. In fact all businesses struggle with these issues again and again as they grow.

Having successfully addressed each of these items, a business must be vigilant to address them again and again. This is true because the world keeps spinning. Having created a good management system, for example, the business world evolves. And therefore the management system must be re-created in light of the new world order.

The same is true for vision and purpose, financial planning, and all the rest. The work of working on your business is never completed.

Remember, these are the top ten reasons small businesses fail. It only takes one of these to fail! So you need to continually tune up all of them. And don't be too confident because you haven't addressed these and you haven't failed yet. The fact that you haven't failed "yet" doesn't protect you from the future!

A Few Weeks Ago a gentleman came up to me after one of my presentations. He looked at the price of our new book (about two hours labor) and commented that there's a growing crowd of people making money off of computer consultants. Well, I suppose that's true. Consider companies like MSPU, MSPSN, Cloud Services Depot, and Virtual Administrator. Consider coaches such as George Sierchio, Matt Makowicz, and Stuart Selbst. Consider marketing wizard Robin Robins and a handful of newcomers.

In some sense it's true that there's a growing crowd of people with a package or a product to sell to SMB Consultants. But it's also the case that this "crowd" stays in business because they help consultants address The Top Ten dangers listed above.

You might learn all your lessons yourself, painfully and one at a time. You'll pay full price for this education. Or you can engage someone to help you address the issues that are challenging you and put yourself on solid footing.

When I look at spending money for my business, I always consider two factors. One is how many hours of labor do I need to sell to pay for it. In other words, I don't think in dollars directly but in labor exchange. I have a limited number of hours to sell in a month. Once "spent" on one thing, those hours are not available to spend on something else.

So ASCII costs me one hour per month. Robin Robins costs me one hour per month. With travel requirements, Taylor Business Group costs me 15-20 hours per year.

The second thing I consider is how the new thing will make me money or save me money. ASCII saves me thousands of dollars per month. Robin Robins' program only needs to help me get one tiny little client to pay for itself. TBG needs to help me save a few hours OR get a new client.

Unfortunately, I am never removed from the equation. None of these things matters at all if I spend the money and let the resources pile up on a shelf. I need to work every day to make these things pay for themselves. But in the end, every one of them is worthwhile if I'm putting out the effort to work on my business.

And that brings us back to Gerber. His greatest call to action is that someone needs to work on your business and not just IN your business. If you're the owner, then you're the best candidate to take time to work on the business instead of working in the business.

Review that top ten this week. You probably have Friday off, right. Spend some time taking stock of where you are and what you need to work on in the year ahead.

If I can help, ping me.

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  1. Well said, Karl!

    As the need and dependence on technology grows, SMB Technology providers have to be strong and run like true businesses to be there for current and future clients.

    Companies such as your IT business are important cogs in the economic machine as the SMB world pumps the most money and jobs into the economy.

    Looking forward to a bright 2010.


  2. "There is a growing list of people making money off computer consultants..."


    That's because there is a growing number of businesses that are growing beyond being "computer consultants" and doing so requires a lot of knowledge and help.

    I'm not blogging this, but my favorite SPF riddle is:

    Vlad: How do you make money helping people sign up and use Gmail?
    SPF: My clients would never...
    Vlad: And your marketing budget is?
    SPF: Word of mouth.

    It's the whole chicken-egg thing.


  3. Thanks for the comments guys. It is an interesting measure of health that a growing number of people are making money from "X."

    As always there's a three tiered division of people in category X. First there are those big enough that they have a budget. A budget for tools, a budget for marketing, a budget for training. They spend money.

    Second there are consultants who haven't always spent money but are learning that they need to do this to grow at a faster pace. Yes they'll grown naturally through trial and error. But they are realizing that they can "buy" their way bigger by spending money in the right places.

    Third there are companies that don't spend money on anything they see as expensive. These folks will eventually fade out, learn the lessons themselves, or move to the second group.

    Most companies start in the third group, move to the second, and some of them end up in the first.

    I believe we're seeing growth in the second group.

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  5. Good stuff Karl, thanks for the reminders. I like the original better than 'Revisited', however I don't believe the original is even in print anymore.

    How did you get your blog post to show up on the linkedin update? I would greatly appreciate some education on that process!

  6. Thanks Larry. The trick is legerdemain. I have Twitter repost to Facebook and Linkedin. Then I just enter a Twitter post that says "Blogged . . ." and copy the URL.


  7. This is a great post Karl. I think it's great that there are businesses out there that dove-tail the IT industry since it is a sign of the times as to where the business activity lies.

    I've cleverly lost my copy of the E-Myth revisited and your post has reminded me to purchase another. I highly recommmend their website and email newsletters as well which anyone can find on

    Thanks again for the post and best wishes for a fantastic 2010 Karl!

  8. Karl,

    Very much on the money and timely as well! I always marvel at how SMB's can be successful with all the competing priorities. Your follow-up comment on the growth of the 2nd Tier company is correct and this group should see nice expansion in 2010.

    Keep up the good work and we will try to do our part. All the best in 2010!



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