The Number One Reason for Small Business Failure

The Number One Reason For Small Business Failure
By ClockShark | 10 minute read
Running your own business is hard. Whether you’re offering a product or a service, the reality is that it’s going to take significant time and effort to get where you want to go. Failing to set things up correctly from the outset will only make establishing your business even harder.

The quote above is taken from American small business consultant Michael Gerber’s book The E-Myth Revisited. Contained in this work are the keys to ensuring that the business you’re building is actually a business, not just a high-stress, a low-paying job with no easy way out.

Gerber has found, through decades of working with small business owners, that most fail to take themselves quite as seriously as they should. Instead of making the effort to streamline operations and ensure all key functions are being fulfilled, they instead end up as a group of people working towards a rough objective, oftentimes in an overlapping manner.

Like any abstract concept, the information presented here is useless unless we can put it into context… so let’s do that first.

The Construction Worker Who Wanted More

Imagine you’re a construction worker. For the past 20 years, you’ve worked with a local firm with 60 employees. You’re good at your job, and you’ve proven that: you’re now the leader of a crew, with a little bit of authority. You enjoy the work, but not as much as you used to. You’re starting to get tired of clocking in when the boss says you’re supposed to. You’re tired of having to go wherever you’re told, whenever you’re told it. And most of all, you’re tired of working so damn hard – your back aches, you’re stiff in the morning, and you just want a change.

Everyone always thought you had a great understanding of the industry, and that you’d do well if you started your own business. You know that some of the other guys at the firm would be happy to work for you if you took the plunge. A little Friday night encouragement from your buddies at the bar is all you need to push you past the tipping point.

Your family is on board – they know you’re a hard worker and think you have a great chance of succeeding at anything you apply yourself to.

So you set off on your own. Your supervisor is sorry to see you go – you think he’ll be even sorrier when he realizes he’s losing ten other guys on the same day. You rent an office, post some local listings, and wait for the business to roll in.

And it does – but it’s more of a trickle than a flood

You’re not quite as busy as you’d expect to be. Sure, you’re getting a few clients, but some days, the crew spends more time sitting around idle than they do actually working. As well as that, you’re having trouble handling things in the office. You thought all you’d have to do was make phone calls and direct the crew to wherever the work was, but instead, you’re trying to handle 50 different things at once: payroll, balancing the books, marketing, networking with clients, negotiating with suppliers... When it’s all said and done, you’re working 60-70 hours a week and making less than you did when you were at your old firm.

Because business is slower than you thought it would be, you can’t really afford to bring in someone to help… but you know you can’t continue on like this. You don’t have any real idea on how to handle the financial side of things, so you need to get someone in the door as quickly as possible. You want to get back to doing the things you do best: managing crews and working alongside them to get things done.

After a brief search, you find her. Jenny is the perfect person to get your business back on track – she’s worked in the construction industry for 15 years, and she’s good at everything you’re terrible at. She can handle payroll, balance the books, negotiate better terms with suppliers, and even keeps on top of the constant changes in health and safety regulation (something you’ve always struggled with).

Jenny comes in, and you’re instantly relieved. Finally, you can spend time doing the things you do best – working with the crews, collaborating with clients and getting back to doing the things you love about construction.

Of course, you still help out in the office whenever you’re needed… but you think that Jenny has a pretty good handle on things, so she probably doesn’t need your help.

There’s also some other stuff that needs to be looked after (inventory management, keeping track of tools, etc.) – you figure that, since Jenny’s doing such a good job with everything else, she can probably handle these little tasks too.

And she does… until she doesn’t anymore

Gradually, the business becomes more and more dependent on her. She does the work of five people put together, and you never hear her complaining.

One negative – you have noticed that her performance has dropped off a little. Maybe some suppliers have to call more frequently to get paid on time. Maybe clients aren’t paying as quickly because no one is following up with them. Maybe inventory goes missing and no one knows where it went.

Overworked, overstretched Jenny is rapidly approaching her breaking point. Expected to perform all of these extra duties, she has less time to spend on the stuff that really matters. The important is sacrificed for the urgent, and the business suffers.

One day, Jenny decides she’s had enough, and she simply quits.

Sure, she’s apologetic and wishes you all the best, but she’s not coming back. The job was more painful than it was worth, so she’s moving elsewhere in search of something more manageable.

You can understand her desire to leave, but that doesn’t lessen the impact of the loss. You try to get another accounts person in quickly, but you soon realize that you can’t find someone who can do everything that Jenny could do.

Some of them can handle the accounts but hate talking to people on the phone.
Some of them love dealing with suppliers but are terribly disorganized.
And some of them are good at very little – these people don’t get a second look.

The business flounders as work dries up. A reputation for being unreliable is difficult to shake in a local business like this. Understandably, a lot of your crew leave as well – they’ve got families to feed, and sitting around waiting for a contract to come in is a waste of their time.

The business dies a slow death, draining the last of the cash you set aside for it just eight months prior. You close up shop and take a job with a different construction firm – while it may not be perfect, it’s a hell of a lot easier than what you just went through.

Build Your Business Around Roles, Not People

The story above perfectly illustrates the trap that the vast majority of small business owners fall into:

Instead of finding the right people to fit their business, they mold their business to fit the people.

On the surface, you might think that there’s little difference between these two statements. Surely molding your business to the people available is the same thing as hiring people who fit predetermined roles?

It’s not, and it’s not even close.

While the example above told the story of a construction worker who failed to effectively deal with the variety of tasks required of a business owner, there are lessons for everyone here. Any business which becomes too dependent on a small number of people to perform several basic functions is vulnerable to rapid disruption. People quit, get sick, die, or simply stop performing well. When your business is hit with one of these catastrophes, can you adjust and survive, or will it wipe you out?

A superstar employee who has competence in many domains is a valuable asset, one which is not easy to come by. If you’re lucky enough to find someone like this in the early days of your business, it’s quite likely that you’ll squeeze that lemon for every drop of juice it has. No task is too arduous, no new procedure is too complex: with your new partner by your side, you can do anything.

It’s natural to feel this way – if you’ve been bearing the full responsibility of running the business all by yourself, finding someone that can help is a massive relief.

It’s also natural to want to shunt a lot of work off onto them. They’re new and fresh, with a lot more energy for dealing with these stresses than you. You deserve the break (or so your reason), and besides, didn’t you get into business so you could order people around?

And, unsurprisingly, it’s also natural for your star employee to get sick of working for you and give up.

Building your business on the unstable foundation of one key performer with a poorly-defined role is a foolish decision. Instead, you need to begin with the end in mind: develop an organizational chart, figure out what roles need to be filled, and then fill them.

By first determining what the business needs, then finding the right people to fill these roles (whether that’s by hiring a new employee, training existing staff, or shifting personnel from one area to another is immaterial – they’re all appropriate in different situations), you can ensure that your business is built on a solid, structured foundation.

Doing things the other way around (giving existing employees more and more responsibility and work without a clear strategic reason for doing so) will put your business on the fast-track to failure.

Intuitively, this makes sense – it’s a lot easier to replace your “Marketing Manager” than it is to replace Dave, who handled marketing, but also balanced the books, made sales calls in the field, managed inventory and opened the office every morning.

Now that we’re clear on why it’s important to focus on fitting people to your business instead of the other way around, let’s move on and look at how we can create a truly useful organizational chart.

How to create the perfect organizational chart

Every small business is a little different from its competitors. Try as we might, we can’t really take a stock template and apply it to 100% of situations, with no need for modification.

Fortunately, the business has been around for a while. Unless you’re pioneering a cutting-edge tech startup, it’s unlikely that your business model is vastly different from many others that have gone before you… and many more that will come after. This is good news because it means there’s a wealth of information out there about how to run a successful business. Over time, principles of business success have emerged, core functions that need to be fulfilled in order to achieve any modicum of success.

The most important areas of focus for your business will vary. If you’re a retailer who competes on price, you’re going to need to focus on cutting costs wherever possible. If you’re a bank who prides itself on excellent customer service, a large portion of your time will be spent on figuring out what exactly customers need and then giving it to them.

The emphasis on each area may change, but the reality of the situation does not – if you fail to attend to these areas, and instead allow them to be haphazardly satisfied by overworked, ill-fitting employees, your business will suffer.

What areas to focus to avoid small business failure?

Here’s an inexhaustive list:

1. Accounting

This includes (but is not limited to) the tasks of bookkeeping, payroll administration, budgeting, internal reporting, auditing and cost control. Some of these areas overlap, but all are important in every business.

2. Human Resource Management (HR)

The area of HR governs how you deal with your employees. It includes domains such as onboarding, training & development, hirings and firings, workplace safety, and more. Your people are your most important resource, and you need to look after them.

3. Marketing and Sales

The best product or service in the world is useless unless people know about it. You have to promote your offering to interested parties, acquire customers, and gain repeat business. These days, marketing has shifted towards digital platforms and mediums, so most roles in this area will require a certain level of technological competency – but of course, the ability to sell face-to-face will never go out of style.

4. Customer Service

This is an area that’s closely linked to the one above. The cheapest customer you’ll ever acquire is an existing customer, and their referrals are an inexpensive, massively effective way of increasing your client base. Satisfied customers are your best defense against competitive threats. Once you own the relationship with your client, the likelihood of customers leaving your firm for another is dramatically decreased.

5. Operations

This governs the area of your key offerings. Whether you’re selling a product or a service, you’re (presumably) doing something worth paying for. The more complex your offering, the more complex this area will be. Depending on what your business is, this could incorporate the domains of production, distribution, R & D, etc.

6. Managerial

This area is a little different, as it’s interwoven into all of the others, as well as being a separate consideration in its own right. Obviously, someone needs to be in charge of each area – employees need to have someone to report to, to guide them, to chastise them when necessary. Leaving these concerns aside, you also need someone to take care of the business in an overall sense. As the owner, this task will likely fall to you.

You need to ensure that the business is acting and developing in alignment with your vision and that this vision is reflected in the strategies, tactics, and operations of the business.

Failure to perform in one of these areas can have huge ramifications for the others

Each of these areas contains several roles. Depending on the size and nature of your business, the need for all these roles is diminished e.g. you may not need a distribution manager if you’re in the service sector, or if you outsource fulfillment to a third party.

Regardless, your organizational chart needs to map out the business in these areas, clearly illustrating the various roles to be filled. This process often takes some time. If you’re a detail-oriented, organized person, it’s likely that you’ll have little trouble figuring out what exactly the business needs, and what everyone does… but for the rest of us, it’s not quite as straightforward.

Whether it’s easy or not, it’s worth doing. Understanding the accountabilities of each role in the business has a number of benefits, not least of which is that it provides an easy way to assess an employee’s performance in a particular area.

It also helps to clarify hierarchy. When you can clearly see which roles/employees report to which managers, you’ll be able to tell if there are communication issues lurking beneath the surface. Multiple managers having a say about what a particular employee should do in a role is a recipe for disaster.

Now, there’s a good chance that you’re reading the paragraphs above with some confusion. Depending on the size of your business, it’s quite possible that your chart will look something like this:

The Number One Reason For Small Business Failure

This kind of situation is not uncommon. Particularly in the early days of the business, most owners will take on more than their fair share of work, spreading themselves across all these areas and more. It’s difficult, but often a necessary part of building a business.

It doesn’t particularly matter that you don’t have a separate person in charge of all these areas, or that you have employees working across multiple domains (e.g. salespeople may also look after customers, your clerical staff can work part-time in HR and accounting). What matters is that the proper amount of attention is given to each of these areas.

A small company will often be made up of just the owner and a few supporting employees. In situations like this, it’s easy to let certain roles fall by the wayside – maybe you think your operations are solid, so you neglect to make improvements in this area, or you don’t actively focus on monitoring employee performance.

You can be involved in all aspects of the business

But managing your time (and the time of employees) effectively is the key to success.

The need to fulfill roles in all these areas applies to large corporations, solopreneurs, and small companies alike. If you fail to spend enough time in each area, the business is sure to falter before long.

Referring back to our example above, we can see that you (the owner) are also involved in the areas of Accounting, HR, Customer Service, and Operations. Every week, you have to spend time on activities such as:

– Ensuring that your assistant is balancing the books correctly
– Determining whether or not you can/should hire a new employee
– Taking care of existing customers
– Helping to deliver whatever it is the business does (e.g. working on a job site)
– Making sure that the business is headed in the right overall direction.

The amount of time you spend on these tasks (and everything else you have to do) will vary depending on your business needs. Maybe your assistant is a former accountant who doesn’t need much regulating, or maybe you have a great crew who can handle the practical side of things.

The key point is that these roles cannot be ignored. Understanding exactly what’s required in a particular area, how much time is spent on it and who’s responsible for getting things done there is the only way to build a business that can survive and thrive in the long-term.

If you notice a deficiency in one area (e.g. you’re spending very little time overseeing your salespeople, and their performance has declined), this kind of internal time auditing will help you to figure out if you should:

1. Budget more of your own time to dealing with it,
2. Get another existing employee to deal with it (if available), or
3. Hire someone else to deal with it.

Without tracking the time spent in each area by each employee, and knowing who’s responsible for results in that area, you won’t be able to adjust accordingly. Take the time now to get this right, and safeguard your chances of growing into the future.

Reconciling The Organizational Chart to The Organizational Pyramid

The Number One Reason For Small Business Failure

The above diagram represents a company’s hierarchy in pyramid form, starting at the leadership level and trickling down into operations. Once again, a small business’ hierarchy will not be as clearly defined like this: it’s unlikely that you’ll be able to occupy the leadership level without also having a big part to play in the strategy, tactics and even operations of the business.

Referring back to the organizational chart, the leadership level corresponds to the owner/CEO position. The strategy and tactics are governed by whoever’s in charge of each area (e.g. an HR manager will have a lot of autonomy when it comes to selecting HR strategy), and the operations consist of the various roles in each area (e.g. operations in the Accounting area include bookkeeping, auditing, budgeting and cost control).

These two models, taken together, will help you to accurately map out the different areas, roles, and responsibilities present in your business. It’s possible that you’ll realize you’ve been neglecting one area entirely, or that there’s one employee being shunted across the company into a variety of important roles. Both of these findings are cause for concern, and with this information, you’ll be able to act quickly to rectify the situation before it becomes a problem.


Running a small company is hard. Not only do you have to focus on delivering a quality product/service, but you also have to take care of everything else the business requires. These requirements exceed simply having an awesome offering – you also need to attend to concerns in the areas of:

1. Accounting
2. HR
3. Marketing and Sales
4. Customer Service
5. Operations

… and managing all the above, as well as the business in general.

Any business that neglects to build itself around the fulfillment of roles, and instead becomes dependent on the performance of one or two superstar employees, is a business vulnerable to outside forces. This is particularly true when you become too dependent on anyone apart from yourself. No matter how productive and committed they are, it’s unlikely you’ll find an employee that’s as committed to your business as you are.

Creating an organizational chart that details the various roles and functions required in your business is a necessary first step. It doesn’t strictly matter if you have an employee responsible for a number of positions (as the owner, you’ll probably find that your own name crops up quite a bit!) – what matters is that you’re clear on what’s happening.

Once you’ve done this, you can use the organizational chart to spot deficiencies in the business. It can also be a useful aid when it comes to figuring out where you’re spending your time, and where this time could be better spent. You’ll never know what’s hampering your business growth unless you understand the full extent of operations as they are.

The organizational pyramid offers some valuable guidance when it comes to structuring your organizational chart. You can see a clear hierarchy – leadership lies at the top, operations at the bottom, strategy, and tactics are sandwiched in between. This understanding of hierarchy will help you to identify communication bottlenecks and inefficiencies in the business – if no one is attending to the overall strategy of an area, then it’s unlikely to be well-optimized.

You can’t hope to succeed unless you first understand what’s going on in your business. Without this knowledge, your business will remain vulnerable to disruption, overly reliant on all-too-human employees, and undeveloped in critical areas.

Take the time to map out your company’s organizational chart today, and reap the benefits tomorrow and into the future.

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