Every year there are 543,000 new businesses started up and most of them close shop before 5 years are up. The most cited reason for Business Failure is due to financial problems. On the one hand, most new businesses lack significant funding to achieve the goals set within these critical first years. On the other hand, and more significantly, the leadership team lacks the discipline to control their finances and weather the storms of the fledgling years. Securing financing is easier than training the leadership team to manage the finances conservatively and appropriately.
Business Failure of Single Owner Businesses
When analyzing single owner small businesses it is obvious that the most common cause of Business Failure is keeping private finances distinctly separate from company finances. In other words, they will be tempted to dip into the company funds during tight times with their personal finances. The thinking goes something like this,
“Why not! The company is mine and I have no one else to answer to. Whatever money it makes belongs to me. Why muzzle the ox while it is treading out the grain? My family needs to eat and my company has some money lying around. I’ll return it as soon as things get better with our personal finances.”
Of course, even if things do turn good the owner may return the money the first time he dips in, but the second and third times – and there will be second and third and fourth times if there is a first – he will be less likely to return the funds after the first time. This spells out the end of the business even if it limps along for another 3-4 years. It is doomed due to the lack of financial discipline of the owner.
Discipline Single Most Important Factor to Success
Discipline in business management is the single most important factor to long-term success and the lack of it in Business Failure. When it is lacking it shows itself most painfully in finances. When investors examine a business to invest in, the primary factor they consider is the ability of the management team to create success. When one or more members of the management team lacks the rigorous discipline required to accelerate a business’ growth, investors shy away because of the greater chance of Business Failure. An investor’s interest is almost exclusively in the success of the business. So the factors they give the most weight to are certainly going to have the greatest impact on whether or not a company will last these first five years. Never underestimate the power of discipline in business and especially related to Business Failure.