Checking in: Ten reasons small businesses fail

Home Editorials Checking in: Ten reasons small businesses fail

by Steve Feldman

The economic downturn has claimed its share of floor covering retailers. The good news is we are in the midst of a recovery, although many have yet to feel it because it is not being driven by the consumer or housing. The bad news is a number of experts believe more retailers shut their doors on the way up than on the way down because they can’t fund the recovery.

One of the least understood aspects of retail is why small businesses fail. In many cases, the customers have a better understanding than the owners of what wasn’t working. Here are some specific reasons why retailers close up shop, culled from a few articles I recently read.

1. Not enough demand for the product at a price that will produce a profit. This, for example, would include operating a retail business and trying to compete against Home Depot or Lumber Liquidators on price alone.

2. Owners who cannot get out of their own way. They may be stubborn, risk adverse or conflict adverse. They may be greedy, self-righteous, paranoid or insecure. Sometimes, these owners will recognize a problem but continue to make the same mistakes over and over.

3. Out-of-control growth. Some successful businesses are ruined by over-expansion. We have seen this numerous times, particularly with geographic expansion. This would also include moving into markets that are not as profitable or borrowing too much money in an attempt to keep growth at a particular rate.

4. Poor accounting. You cannot be in control of a business if you don’t know what is going on. With bad numbers, or no numbers, a company is flying blind. It’s why so many retailers have embraced systems like RFMS, QFloors, etc.

5. Lack of a cash cushion. If we have learned anything from this recession, it’s that business is cyclical and downturns will happen over time. This could be due to the economy, a new competitor or lawsuit. If a company is already out of cash (and borrowing potential), it may not be able to recover.

6. Operational mediocrity. If you’re not doing the things that made you successful in good times, like marketing, advertising and regularly contacting existing customers, you’re not maximizing potential sales. Repeat and referral business is critical for most businesses.

7. Operational inefficiencies. This would include paying too much for rent, labor and product. Now more than ever, the fat must be cut; lean companies are at an advantage.

8. Dysfunctional management. I hate to say it, but many store owners would be best served leaving the day-to-day operations to someone more qualified. Many owners lack focus, vision, planning, standards and everything else that goes into good management.

9. Lack of a succession plan. Some reasons family businesses never make it to the next generation are power struggles between family members and significant people being replaced by others in over their heads.

10. A declining market. Competition from huge companies with more buying power and advertising dollars, such as the home centers, Empire and Lumber Liquidators. It forces small retailers to always play at a high level.

There are many more reasons, but if any retailer falls victim to any of the above, it’s time to make some changes, especially as the economic landscape slowly improves.

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