Why Small Businesses Fail – 3 of 4

This is part three of a four part series of posts that summarize an article that first appeared in the March 1982 Small Business Report.  In the first article (click here to read Article 1) I focused on financial pitfalls and excessive optimism as two of the many causes for small business failure.  In the second post (click here to read the second article) I discussed the inability to change and rapid growth as two more reasons that small businesses fail.

The publication, Small Business Report, which published the original article is, I believe, no longer being published. However, if you should know of this magazine and either its online or actual contact information, please let me know so I can give proper attribution.

This post will discuss the following three factors that can lead to small business failure: improper organizational structure, failure to delegate, and lack of succession planning.

IMPROPER ORGANIZATIONAL STRUCTURE – As a general rule, organizational structure begins to be important once your company reaches approximately $500,000 in annual sales.  When your yearly revenues are within the range of $1 – $3 million, you will typically need two or three formal department structures.

Of course, these are estimates.  The nature of your business will dictate when and how you establish a formal organizational structure for your company. The main thing to remember is to organize conservatively–avoid structuring yourself to death.  In a small company, it is often more critical to get things done that to get things done perfectly.  To put it another way, as my mentor used to say, it is more important to be effective than efficient.

You should only establish an organizational structure when the benefits gained have been carefully analyzed, and it is determined that they outweigh the disadvantages. If you have too much structure and control, you will prevent your employees from performing up to their capabilities.   In a small company, you want to encourage initiative, not conformity, in your employees.

You can ensure that you do not have an inappropriate organizational structure by asking your employees these two simple questions:

1. “How can I help you do your job more effectively?”
2. “What do I do that prevents you from doing your job, or doing your job effectively?”

If you do this, you are likely to find that you do not always know the only way–or even the best way–to do things. You will come to realize, if you don’t already, that the employees that actually do a particular job know more about that job, or at least know different things about the job, than the manager does.

FAILURE TO DELEGATE – Small businesses are typically founded by people with expertise in a very specific skill.  As the business grows, however, technical skills are less important than managerial skills such as coordinating, organizing and directing the company.  If you don’t think that technical skills are less important than managerial skills, at least acknowledge that managerial skills are just as important as technical skills if a company is to survive.

A key aspect of managerial skills is the ability to delegate. Your company simply will not survive if you, as a manager, do not learn how to get things done by others instead of trying to do everything by yourself.

Even when management recognizes the need to delegate, they only hire more assistants to help get things done. Don’t make this mistake.  When you add employees to help but they cannot exercise independent judgement, it will only create more work for you.

Delegating authority and responsibility is difficult–no question about it. But if you do not share your authority, the overall administration of your company will decline and your business will falter.

LACK OF SUCCESSION PLANNING – You won’t live forever, and you won’t always work for your company, even if you are the one who started the business and managed it to its current level of success.  Seems obvious, doesn’t it?  Of course it is.  Yet, even though they know this, many managers and business owners fail to take the time to develop future management talent to ensure that the business will survive over the long term.

Small companies are particularly vulnerable when a key production, marketing or financial executive leaves to retire or take another job. If you haven’t planned for succession in these critical areas, you will have no backup to carry you through the transitional period until you find a new executive.  This is precisely the time when your business can falter or fail.  If you have to take on the additional responsibilities, you risk damaging your health and family life.  Even if you remain healthy, the distraction of the additional duties almost guarantees that one or more areas of your business will lack proper attention, creating more problems, demanding more of your time, and so on, beginning a vicious cycle that is difficult to break.

You can assess your vulnerability by evaluating all key positions and identifying who can fill the gap if a key executive becomes ill, quits, or retires. A good way to make this assessment is to monitor the effect of a key employee’s absence when they are on vacation or sick leave.

Succession planning and employee development is costly, but the benefits far outweigh any expense you incur to start and maintain this process.

Next Post:  Poor management systems, failure to know what your business is, and inadequate board of directors.

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