Why Small Businesses Fail

Hello. I've been working as a coach and mentor for a few years now and the people that call me and want to speak to me about coaching tend to fall into two very neat camps. The first sort are the ones that you really want to work with. They're the ones that are trying to get their businesses to the next level. They're usually expanding, they're trying to increase their productivity, or they're struggling with some of the things that us entrepreneurs come up against every day. And they're wonderful clients. And they're also my bread and butter. That's where I want to spend my time. I also get calls from businesses that are failing. Unfortunately, they normally call me when it's much too late. And that means two things. Firstly, it's not enough time for me to make an impact and try and save that business. And secondly, they usually can't afford to pay me either. So I don't tend to take very many of those on. So today, what I want to do is take what I hope won't be a very gloomy look at why it is that small businesses fail. Welcome. So you're on your entrepreneurial journey. You've borrowed all you can from your mum and your dad and your great aunt Nelly. You've put your life savings and every ounce of energy into your business for the last year or so. What could possibly go wrong? Well, an awful lot by the looks of it. Most businesses don't make it through their first year, even fewer of them make it through their first three. So I want to pick up on a few of the common themes, a few things that I've seen again and again, in the businesses that come to me for help. My name is Phil Jackson. I'm a coach and a mentor, and I've made it my life's work to bring you the tools you need to master to build the business you deserve and enjoy. So what goes wrong in these businesses? Well, firstly, and most importantly, I think there is a massive underestimation of the amount of income and profit that a business needs. This goes way back to your plan. Now, I'm not a big fan of business plans, to be really honest with you. I think unless you're looking for outside investment or loan capital, then I don't really think a huge business plan in lots and lots of detail is awfully useful, particularly in the early days of a business. I think things change so quickly, and as entrepreneurs, our nature is to adapt to those changes so quickly, it's very easy to lose sight of that business plan very quickly indeed. So I don't think it's worth spending lots of time mapping out in minute detail how the first few years of your business are going to look.

Until you're in it, until you're living and breathing that business, you just don't know what it's going to look like. So let's not pretend that we do. Let's not rely on very unreliable forecasts. I do think, though, some of financial planning is absolutely vital. You need to figure out exactly what sales you need, what income you need, what profits that's going to generate, and how those profits are going to be reinvested in the business to your further success. Now, I think people underestimate the amount of profit they need. I also think they underestimate the amount of profit they need to reinvest, which I'm going to come to slightly shortly. So how much are you going to need to spend on marketing, for example? Now, ideally, marketing generates an immediate return, but very often in a new business, it doesn't. It's about creating that background noise that we can then spin our promotions off. So how much are we going to need to invest, actually, before we start getting any return on our marketing? How much are we going to be looking at in terms of development? How much time is it going to take to get new products to the market? So make those estimations, by all means. Don't go into minute detail, but whatever it is that you think you're going to need, try doing some rounding up. Try and have some extra profit. The worst that happens is that we become too profitable too quickly, and that's not a bad place to find your new business in. So that takes me on to my second point, and I see this a lot in owner-operated businesses, where they've started to build a team, and they're starting to step back from the business purely into a management role. And what happens is they expect to be able to bleed the business dry a little bit. They're taking too much profit out of the business and not leaving enough for reinvestment. I think part of it is down to the tax regime that we have here in the UK, and it's not something I want to go to in great depth, but it is tax-efficient for you to take income from your business in the form of wages, and then also dividends, which is your return on your investment. And as a business owner, that's very attractive. I think we're taking too much in dividends too early on. We're wiping out the profits that are available for the business. We're not having that reinvestment in the structure of the business, in the development of new products, that's going to keep us long-term profitable. And I think it's naive of you to expect to be able to take a big chunk of profit and also a very big wage

if you're not actually carrying out any kind of selling or service in your business. You're going to have to keep very close tabs and grow your team probably a lot more than you think before you can step back and just purely manage the business without operating yourself. And the final point I want to make is that I see lots of businesses that are set up relying on existing customer loyalty. My background, when I started out coaching, is in the salon space. I was helping hair and beauty salons to make more profits, and I see this an awful lot. So let's take a hair salon as an example. I've been working in a hair salon for somebody else for lots of years. You fully expect that when you go and open your own salon, lots of your clients are going to maintain that loyalty and come with you. It's just not true, or at least not to the extent that you expect. People are very often resistant to change. Sometimes they will stay in a miserable situation because their fear of change is so great. We see this again and again in situations where people are victims of domestic violence. The idea of change is so terrifying. They've been brainwashed into thinking that change is so unsafe that they keep themselves in a very unhealthy environment and relationship. And it's unfortunately the same with customers. They would much rather keep going to the same business they've been going to for years rather than follow you, even though they love what you've been doing for them in the way of customer service. So don't rely too much on loyalty. However many customers say they're going to come with you, halve the number, or even be more conservative than that. That way you've got a realistic idea of the number of new customers or leads that you need to generate in your new business to start hitting profitability. And if the numbers don't stack up once you've halved that number of potential leads, I'm afraid you need to re-look at your business model and look where other savings can be made, or you're going to have to invest a lot more in your marketing. I hope that's been useful to you and not too gloomy today. If it has, please don't forget to hit subscribe. I do a broadcast like this every single week and I would hate you to miss out on the content that I'm sharing. If you've already subscribed, join the conversation with me over on Facebook or I will see you again next week. Take care.