According to U.S. Census data, new Black-owned businesses are being started at record paces. Between 2001 and 2014, Black-owned businesses grew at a rate that far outpaces any other racial group. Unfortunately, the downside to this rapid growth in new Black-owned businesses has been a record number of business failures.
In this article we will detail the top 6 reasons that Black-owned businesses fail and steps that can be taken to reduce the failure rate.
- Starting Business for the Wrong Reasons:Some of the most often mentioned reasons for starting a business are wanting more spare time (eventually), flexible schedule, no longer wanting a boss, and pursuing your passion. While these are all legitimate reasons, they are not always strong enough to carry the motivation and enthusiasm needed for business success through tough times. They also underestimate what is required for business, especially in the early days. Some key factors that should be considered when starting a business are level of expertise in the industry, amount of capital needed to start up and sustain, and being realistic about how much time and resources will be needed.
Starting a business places a strain not only on the business owner, but families and relationships as well. Before you start a business, make sure that you are starting for the right reason and are prepared to handle all of the many responsibilities of a business owner.
- Capital Shortfall:A mistake that is often made when starting a business is underestimating how much capital is needed and overestimating revenue in the early stages. Starting a business requires not only capital for the purchase of the business, but also needs working capital for such things as inventory, marketing, payroll, office space, etc. Not properly estimating how much capital is needed forces the business owner to make tough decisions about finances more quickly than anticipated and more often than not, those decisions are detrimental to the business.
A good rule of thumb to estimating the amount of capital needed is to double your original estimate. This will provide a longer runway for success and allow the business owner to focus on growing the business without the immediate strain of finances.
- Lack of Commitment:Starting a business requires someone who is committed to ensuring that it succeeds. This will include long hours, tough decisions, and doing tasks that you do not like to do. Neglecting the business will cause the business to fail. Many small businesses have failed because the owners didn’t invest the time and effort needed for success. Far too many people are sold the false dream of a 4-hour work week or only working 20 hours per week. In the early stages of business, this simply is not true.
If you are starting a business, make sure you are prepared to be fully committed to its success. Anything less than your maximum commitment will likely lead to failure.
- Too Much Overhead:Stop me if you have heard this before: someone is going to start a business so they rush out and get a logo, business cards, office space, an assistant, new office furniture, new computer, and do not have a plan for generating revenue. This business will be an uphill battle all the way because the expenses of the business are high from the start. One key to success is to keep overhead and expenses as low as possible. Expansion and increased overhead should not come until there is revenue to support it.
It is a fairly simple equation unless you are a venture-backed startup in Silicon Valley, that if your expenses are greater than your revenue for an extended period of time, your business is likely to fail. You must be extremely focused on keeping expenses low.
- Lack of Delegation:Small businesses struggle in the early stages as the owners attempt to do every task and do not effectively delegate tasks to other people and manage their performance. There are a few reasons that this happens. The first is that many owners are control freaks and do not believe anyone can do as good a job as themselves. For this reason, they try to do everything themselves and do not realize that they are not getting everything done and wasting time on administrative work that takes away from growing the business. The second reason is that due to a lack of funds, small businesses usually hire lower-paid employees that are less skilled. In this case it is true that the quality of work is less than adequate, but since the business cannot afford higher-paid, well-skilled employees, it must deal with this until it grows.
For the best results, the business owner should delegate as many tasks as possible and then performance-manage their team for continual improvement. Employees will often outperform expectations when given responsibility and coaching.
- Failure to Plan:The thought of writing a 30-page business plan is overwhelming to most, which is why only a small percentage of small businesses have them. Although a full business plan is ideal, something much shorter will suffice. The most important reason to have a business plan is to ensure that you have considered every aspect of the business and how it will be handled. It also sets a clear picture of the future and keeps everyone focused on the right tasks. When there is not a written plan, the business can go in various directions and too many situations will occur that have not been planned for.
If you are starting or operating a small business, you should at minimum complete a 2-3 page business plan that addresses all aspects of your business. You will be surprised at the level of focus and clarity this will provide as you go forward.
To start and operate a business is not an easy feat and requires both skill and luck to be successful. But there are things that the business owner can do that will help to ensure they do not fall to the pitfalls mentioned above.
What are some of the reasons that you have seen that cause Black-owned businesses to fail? What can be done to fix that?