Why Do Most Small Businesses Fail?

If you’ve ever been interested in working for yourself, or starting a small business, you’ve heard the statistic that most small businesses fail within the first 5 years. Why is that?

The most common reasons given are:

  1. Lack of experience
  2. Being under-capitalized (running out of money before you achieve profitability)
  3. Poor location
  4. Poor inventory management (Not having enough of an item, or having too much which may suck up all your capital)
  5. Poor money management (poorly structed business loans, co-mingling of finances)

But I think the most basic one is lack of any business sense whatsoever!

I went to get a smog check for my car registration and I called up several smog check test centers within a 10 mile radius. I got quotes that ranged from $37 to $70.  The fact that the highest quote was 89% higher than the lowest quote was quite interesting.

I decided that instead of driving 9.5 miles to pay $37, I could drive only 2 miles and pay $39.95. That’s a good compromise between time spent and money saved (especially in Los Angeles where it takes forever to get anywhere).  However, I decided to stop at the first one I saw and ask if they’d do a price match, especially since the store was completely devoid of any customers. I asked them how much it would cost and was quoted a price of $65. I told them the store down the street quoted me $40 and the manager said that he knew the owner of that place and they indeed offer a $40 price, but he could afford to offer that price because they did a higher volume and made money on repairs too.  The best he could offer was $55.

I tried arguing with him that they probably did higher volume precisely because the price was lower, and that his costs were fixed and the marginal cost of performing an additional smog check were significantly lower than $55 or $40 or even $20. When you consider that you have idle staff and idle machinery, the cost of running a machine for 20 minutes is just the cost of electricity which couldn’t have been more than a dollar. By price matching price-conscious customers, you’re engaging in a perfectly legal form of price-discrimination which allows you to attain your optimal profit levels. After wasting 3 minutes, I realized he wasn’t going to budge and he was perfectly happy to see me go 1/2 mile down the street to his competitor, which incidentally seemed to be running at 75% capacity.

So if you’ve ever wondered why some small businesses fail its because they’re run by incompetent morons who lack knowledge of finance, marketing, consumer behavior or sometimes just plain common sense.

How To Start Multiple Businesses

A couple of years ago, I went to a real estate seminar and met a successful businessman. He was in his sixties and I was amazed to learn that he had more than a dozen small businesses going and was also trying to start his own bank.

Since I wanted to find out how did he manage to run so many different ventures, I offered to buy him lunch. (Incidentally, that’s a great way to cheaply pick the brains of someone who normally wouldn’t give you the time of day!)

Most of the various businesses he ran were some how interconnected and did a lot of business amongst themselves. Since they were in somewhat related fields, the management was a lot easier. For example, one of his businesses was writing newsletters for Trade Unions and another one was printing & mailing services.

I also learned that he had small interests in a dozen more businesses. He had cultivated great relationships over the years and whenever one of his friends needed advice on starting a new project, he would get the right people involved and help get them up and running. In return get a minority ownership stake in them, but then he moved on to other ventures. He also got a seat on the board of directors, so he had involvement in the general direction of the business but his actual time commitment was pretty small after the initial push.

I’ve always thought that was a great model to follow, especially for someone like myself with a short attention span! Not only do you not have to work a whole lot, but if have enough of these going, they provide economic diversity and lower your financial risk.

Recently I’ve partnered with some friends to create WebStigma, a  San Diego web development and web design company that focuses on business strategy and online marketing.

[Webstigma: san diego seo]

Between us, we have experience with creating business and social networking websites, creating online business development plans and strategies, web-based applications and providing search engine optimization and marketing solutions.

If you’re interested in hiring us, mention that you’re a reader of “Living Off Dividends & Passive Income” and we’ll give you a 10% discount. Use the contact page on the Webstigma site to get a quote. No project is too small or too large for us!

And the best part is that my partners know I’m going to be studying for my MBA full-time and are OK with me working only part-time.

Starting An Ecommerce Site

If you’ve ever thought of starting an ecommerce site but don’t know how, a good place to start your research is over at Net Business Blog.

Check out the post on
The Golden Rules of Ecommerce where the author describes his experiences at starting an online memory store.

Its a long post but some of the main points are:
1. Love your customers
2. Implement Just-In-Time inventory management
3. Control your marketing budget, especially for print media
4. Learn about marketing and don’t spend too much on it if you can’t genuinely track the results
5. Have an exit strategy and know what sort of business you’re getting into up front. (whether you’re buying a low-paying job or a scalable business).

And if you want more info on starting an Ecommerce Site, you can check out the real secrets here.