Why a large number of small businesses fail

Home Office Computing, May, 1994

Although small businesses have been credited with providing the bulk of new employment, there is still an overwhelming rate of business failures each year. "The real reason we hear such alarming statistics with respect to small business is because people in this country go into business for the wrong reasons," says Michael Gerber, founder and CEO of Gerber Business Development Corp., an international small-business consulting firm, U.S. Chamber of Commerce guest speaker, and best-selling author of The E-Myth: Why Most Small Businesses Don't Work and What to Do About It (HarperBusiness). Gerber has compiled a list of the top 10 reasons why small businesses fail based on his 17 years of small-business research and his work with more than 10,000 clients. "The vast majority of small businesses are dysfunctional because the owners have a work mentality, not a business mentality," says Gerber. "The self-employed, especially those who are home-based, become consumed with either getting work or doing the work."

Gerber's Top 10 Reasons For Small-Business Failure

1. Lack of management systems. Most entrepreneurs have no systematic way of generating information or determining what is and is not working. Also, there is little or no effort to convert data into usable information.

2. Lack of vision and purpose by the principals. Entrepreneurs need to view their businesses as a means to an end. Bill Gates, for example, has become successful because his purpose was to put a computer in every home and his business was a way to achieve that goal--not vice versa.

3. Lack of financial planning and review. Most self-employed people concentrate primarily on generating income when they should be most concerned with building equity.

4. Overdependence on specific individuals in the business. An entrepreneur who hires employees or uses subcontractors tends to look for people who specialize in areas he himself knows little about or has no time to learn. The correct method is for the entrepreneur to learn the process and then train employees on how it should be done in his company.

5. Poor market segmentation or strategy. Most entrepreneurs don't know who their customers are. Factors such as customer age, geographic location, and family size can have an impact on what and how they buy.

6. Failure to establish or communicate company goals. Many businesspeople don't even define company goals in their own minds let alone communicate them effectively to others.

7. Competition or lack of market knowledge. The self-employed are often so engrossed in the daily task of running a business that the last thing they think about is what their competition is doing and how they can do it better.

8. Inadequate capitalization/underfunded. Although this factor commonly rates as the primary reason for business failure, it is actually a symptom of underlying problems.

9. Absence of a standardized quality program. Businesspeople need to establish and evaluate processes by which they can attain better results and better serve their customers.

10. Owners concentrate on the technical rather than the strategic work at hand. People are too concerned with working on my business as opposed to working in the business.