Why Most SMBs Fail (or Fail to Grow) and What to Do About It

Things can go terribly, terribly wrong. 

In a flash small clerical errors or project management oversights can snowball into losing your business. Or worse, teetering on the brink of bankruptcy. 

According to the Small Business Administration (SBA) this happens all of the time:

• 20% percent of small and medium sized businesses fail in their first year.

• 33% of small and medium sized businesses close doors within two years.

• 49% of all small businesses don’t survive past five years in business.

• 66% of all small and medium sized businesses will never see a 10 year anniversary. 

But it doesn’t have to happen to you or the employees that rely on you. 

There are steps you can take to avoid a situation like this in the first place. So what’s the one thing that can keep you from losing everything you’ve worked so hard for, and more? 

Know how to fail. 

Here are the most common reasons why small and medium sized construction businesses fail or fail to grow. Get an understanding for what risks might cause you to fail so that you can be proactive in protecting your business at the first signs of distress. 

1. Poor Management

A recent study conducted by the Project Management Institute (PMI) revealed that ineffective communication from project managers is the primary contributor to project failure one third of the time, and had a negative impact on business success more than half the time.

Solution: Even the best project manager will be at a disadvantage without proper workflows and communication that can keep up with the rigors of their day. Find a tool or best practice that can enhance the flow of communication between project managers and their teams. 

2. Insufficient Capital

According to a U.S. Bank study, a whopping 82% of businesses that fail do so because of cash flow problems. 

Solution: Budget, prepare, and analyze cash flow statements to make sure you’re keeping on top of your accounts. Hire a bookkeeper if you can afford one. Or, use an affordable cloud-based software and integrate it with your project management solution to keep your cash flow in check.

3. Location

If you build it, they might not come. Before starting your business, assess the location for demand and viability. For example, a homebuilder in the South will run into trouble finding enough skilled labor to complete work on time. An apartment builder in New York might find an already saturated renter’s market. 

Solution: Research the economic environment, seasonal restrictions, and market demand for the type of construction that you specialize in. Build contingency plans into each construction schedule and contract to safeguard your projects from region specific roadblocks.

4. Lack of Business Plan

Success doesn’t happen by accident. Without a business plan you can’t articulate the many aspects of your business and won’t be prepared to handle problems when (not if) they arise. 

Solution: Create a detailed business plan. It will help you focus on your goals and vision, as well as set out plans to accomplish them. Then, revisit and revise your business plan annually – it should be a living, breathing document.

5. Growing too fast

The slow growth that can keep you up at night during the startup years of your enterprise is nothing compared to the stress of losing control of your company. Too much growth, too fast can hurt the efficiency, level of quality, and execution of your projects. 

Solution: From the get-go, make sure that your workflows are as efficient as possible and don’t leave any room for wasteful practices. You should also structure your company in a way that can run without you, should problems arise. Give your people responsibility and authority to handle things on your behalf.

6. Failure to react to industry changes and innovations

A small business’ initial success doesn’t mean continued success.  Failing to monitor industry trends and evolving means being left behind. 

Solution: Stay on top of the latest technology and trends by subscribing to industry newsletters and magazines. Attend regional tradeshows that allow you to see innovative technology in person. Or, sign up for continuing education classes and webinars that challenge the way you think about your current best practices.

7. Miscalculating the Competition 

Your business will fail if you neglect to gauge your competition and what they can offer your clients. Owners may enjoy your working relationship but if a competitor can offer them added value at the same price, you’ll lose out in the bidding process.

Solution: Stay updated on changes in your competition’s value propositions. With a comprehensive understanding of who you’re up against, you’re better positioned to stay ahead of the game, make owners confident in your offerings, and win more bids.

8. Inventory Management 

According to the 2015 State of Small Business Report, 46% of SMBs with 11-500 employees do not track inventory or are using a manual process to do so.  Poor inventory management eats up your capital and results in absorbing costs year after year.  

Solution: Think of your inventory as cash sitting on the shelves.  If piles of money were sitting in a warehouse, wouldn’t you want a system to track it?  

9. Customer Relationship Management

Only 29% of small businesses currently have a customer relationship system or program in place to nurture present and past partnerships (read: recurring revenue). 

Solution: Maximize each opportunity and make sure that your business’ long-term success isn’t jeopardized. Most project management softwares have a built in contact directory. Use this to create notes about follow-ups and work towards nurturing your relationships all year long.

Entrepreneurship is rarely forgiving. But, if 66% of businesses don’t see their 10th anniversary; that means that 34% of them do. With the right methods, you are capable of being a part of the 34%. 

By learning from the mistakes of others, and seeing the most common reasons why SMBs fail, you’ll be able to see the warning signs of a failing business and stop the bleeding before it is too late.  

In concert with careful and strategic planning, sound execution, and a lot of teamwork, long nights, and coffee runs, you’ll be able to see success continue throughout the lifetime of your company.