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Small business demise: Why some companies succeed where others fail

We all know the critical role that small- to medium-sized enterprises (SMEs) play in our economy. Canada is home to more than 1 million businesses with less than 100 employees and SMEs make up 35 per cent of all businesses in Ontario.

But Canada’s small business failure rate is also quite high. According to Industry Canada, 15 to 20 per cent of new businesses fail within the first year.

The average value of assets declared at the time of filing a business bankruptcy between 2008 and 2012 fell 32 per cent to approximately $168,000 from $247,222, which is indicative that smaller businesses are increasingly bearing the brunt of bankruptcies.

Add to that news from the Canadian Federation of Independent Businesses that optimism among small business owners hit its lowest level in six months in late December, and 2014 could look a little frightening.

Here are some repetitive reasons small businesses fail and what business owners and managers can do to recognize the pitfalls before it’s too late.

Micromanaging
Looking over shoulders at a micro level doesn’t help the business. When the owner is preoccupied with the minutiae, he or she can’t see the big picture and accountability gets lost. It’s imperative to step back, set strategy and invest time and energy into ensuring that the goals are being met rather than overseeing the step-by-step process of others working to achieve those goals.

Jack of all trades
No one is an expert in every aspect of his or her business. It’s imperative to have working knowledge of each area, but there will be times when hiring someone who knows more will be necessary to ensure best practices and efficient use of time and resources. While a budget may be limited, sometimes the investment in the right course of action will positively impact the outcome. If this isn’t an option, the creation of an advisory board, seeking out mentors, case studies or studying other models of success as a business plan can save time and money.

Poor succession planning
Mature, family-run businesses may assume the next generation will take the helm. But if management is second- or third-generation, they often want to put their stamp on the business and that can mean making decisions that are personal in nature and perhaps not best for the long-term succession of the business. If succession planning is nepotism-based, then it’s best to have each generation start at the bottom and work their way up, getting to know the business inside and out. That way, when they do take the helm, they can look at the business in the best strategic way possible and see how their employees make the business function.

Overreaching
Trying to do more to get more can take a business beyond its capabilities early on and set it up for failure quickly. Making lofty deliverable goals, overpromising and under-delivering can be recipes for disaster. Time is the master. For example: Do you have the time to do everything needed to make the money that will allow you to create the capacity for the result you’re promising? “Yes we can” thinking may build morale, but if the goals are unrealistic this mantra can also sink a company. Set realistic goals, and revisit their workability after each goal is met.

Ignoring marketplace trends
There are many feedback mechanisms that customers use these days. Online reviews and surveys can provide a lot of insight, and trending reports are available across industries. It’s very rare that imposing a personal view on an industry or sector works. In order to succeed, a business has to listen to the customer, follow the trends, and adapt accordingly.

Lacking people skills
Having a great business mind does not necessarily translate to having great people skills, including understanding how to manage staff. Getting the best out of one’s employees is a specialized skill. Creating a partnership, hiring the right staff, and delegating well is imperative.

Ignoring early warning signs
There are many signs that a business is in trouble. It’s important to stay on top of numbers from the start, by making sure all financial reports get in on time and are accurate. Otherwise, a business is essentially managing in a fog. And if there appears to be trouble, the best thing a business can do is to get the financial experts involved early.

Michael Baigel is a member of Canadian Association of Insolvency and Restructuring Professionals, and a trustee in bankruptcy at the Farber Financial Group. Michael’s practice focuses on providing practical solutions for small- and medium-sized enterprises in the areas of corporate restructuring and insolvency.

The Canadian Association of Insolvency and Restructuring Professionals (CAIRP) is a national professional organization representing some 950 general members acting as trustees in bankruptcy, administrators of consumer proposals, receivers, liquidators, agents, monitors, and consultants in insolvency matters, as well as nearly 350 articling and 200 corporate and life associates.

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