Why Do Many Small Businesses Fail?

I often receive enquiries from persons who are looking for advice on how to be successful in starting and running their own small businesses. I also get feedback from disheartened business owners who have seen their entrepreneurial dreams transformed into financial nightmares.

A common complaint from local entrepreneurs is that it is extremely difficult to operate a business in Jamaica. However, business challenges are not limited to this country, as international statistics indicate that anywhere from one-third to one-half of new enterprises will fold within the first five years of operation.

While owning a business can be a route to achieve personal financial security, it is a reality that many people will experience a negative result from their entrepreneurial attempts.

There are many reasons why business success may be elusive, but I think they can be grouped into three categories – inadequate knowledge, insufficient capital and inappropriate opportunity.

In analysing many struggling enterprises, you will probably find that the owner had little or no experience in running a business, had limited funds to keep it running until it made a profit, or had a business idea that was flawed from the outset. These internal factors, coupled with various external economic issues, can make business ownership extremely challenging.

If you are desirous of running your own business, I recommend that you get as much advice as possible before committing your time, money and effort into a venture. One book that I have found to be instrumental in guiding new entrepreneurs about business success is The E-Myth Revisited by Michael E Gerber.

The entrepreneurial myth

As its subtitle – “Why most small businesses don’t work and what to do about it” – suggests, Gerber’s classic book outlines some of the entrepreneurial myths and assumptions about starting a business, why these usually lead to failure, and how a fledgling business owner can achieve success.

Gerber writes in an easy-to-read format that is different from the majority of business books which may intimidate the average person. He uses the real-life example of Sarah, a young entrepreneur who is feeling overwhelmed by the pressures of running a small operation. Small business owners can easily relate as Gerber recounts Sarah’s negative business experiences.

Gerber points out that many small enterprises are doomed to failure, as they are established on a false premise by their owners. This entrepreneurial myth is that people who start small businesses are true entrepreneurs. In fact, most small businesses are run by persons who used to work for someone else, such as an electrician, accountant or salesperson.

These persons, who are usually very good at their jobs, make the “fatal assumption” that if they understand the technical work of the business, then they are able to build their own business in the same field. This is the root of most business failures, Gerber reveals, as doing technical work and running a business are two vastly different things.

A business owner with three hats

Gerber indicates that a business owner should ideally consist of three distinct personalities – an entrepreneur, a manager and a technician. The entrepreneur is the visionary and dreamer that creates the ideas, the manager makes plans and organises the work to be done, and the technician knows how to do the actual work of the business.

If these three roles are equally balanced, Gerber explains, then the business owner will be very effective in running the business. However, the typical small operator is “only 10 per cent entrepreneur, 20 per cent manager and 70 per cent technician.” If the technician is mainly in charge, the business will run into trouble, he asserts.

Gerber notes that a business is supposed to grow and change over its lifetime. In the infancy stage, the business and the owner/technician are one and the same thing. The problem is that a technical-minded person wants the opposite of what the business needs to succeed. To get to the next level, more strategic thinking is required, which the technician is not capable of doing.

The technician personality likes to do the actual work of the business and will avoid spending time to learn how to actually build the business itself. This usually results in an enterprise that is wholly dependent on the owner to survive. “If your business depends on you, you don’t own a business, you have a job,” Gerber declares.

Getting to the next level

Too many people only go into business to continue doing the job they had before, but without a boss, Gerber confirms. However, the purpose of going into business should be to “get free of a job so you can create jobs for other people,” he insists. Business owners should not ignore their responsibilities in the financial, marketing, leadership, and customer service areas.

To advance to the second stage of business development, which Gerber calls the adolescence stage, the technician personality must allow the entrepreneurial and managerial sides to develop and flourish. Next week, we will look at Gerber’s recommendations for business growth.

Copyright © 2011 Cherryl Hanson Simpson. No reproduction without written consent.

Originally published in The Daily Observer, May 5, 2011

Read other articles about Negative Business Results:

When Your Small Business Fails Steps to Closing Your Business


Cherryl is a financial consultant and coach, founder of Financially S.M.A.R.T. Services. See more of her work at www.financiallyfreenetwork.com and www.financiallysmartonline.com. Contact Cherryl