Why do so many small businesses fail? For some businesses, it’s because they decided to expand. Here’s why a bigger business isn’t necessarily better.
This is a bold statement, I realize that. And it isn’t true in every case. But let’s step back for a moment and consider this.
What is the goal for everyone in business? To succeed, right? To make money… hopefully lots of it. To be your own boss, take home more pay, maybe have employees… maybe not. To retire early. To not have to work 24/7 just to pay the bills. To work smarter, not harder. These are all legitimate goals.
Many small businesses fail
According to the US Small Business Administration (SBA), about half of all small firms in the US survive at least five years. Not a bad number. However, on the flip side about half fail. Not such a great number when you view it from that side. Does it mean we shouldn’t take the plunge? Absolutely not. Does it mean we need to be cautious in how we do it – and in how quickly we expand our offerings, services, staffs, and offices? Definitely. Fifty percent isn’t that bad, but it isn’t a huge confidence booster so we must proceed carefully.
Expansion – is it a good thing?
Articles abound on the internet about why small businesses fail. I’ll probably write my own soon (hopefully from opinion and not experience since I, myself, am a small business owner). But the one I want to focus on here happens all the time… overexpansion. That’s why the article is titled: “The Biggest Mistake is a Big Business.” Most people start out thinking bigger is better. Start at home and move to an office. Get your own space, set up shop in a bigger location, hire employees, and expand, expand, expand. Basically, that thinking is mirroring what many see in the business world they left. Have a brick and mortar building, employees, walk-in customers, and bam!…you’ve made it!
Am I saying expansion isn’t good? No, not at all. But in some cases you don’t need to expand so much as you need to price smarter. In others, you don’t need to expand so much as you need reduce overhead or add offerings or market your product or service better. Expansion can add overhead which chains you to the absolute need to increase your sales or your business definitely WILL fail. Stay small and build your sales and clientele and your profits will rise without causing your overhead to rise significantly. Work smarter and a little harder, not a lot harder.
I realize my situation as an independent IT consultant and professional author is different than some small business owners. I likely will never need employees and it isn’t critical that I get office space away from home. But I did consider this awhile back and it would have been disastrous for me. I looked at a $500/month office not too far from our house. A quiet, secluded space where I could get all of my work done efficiently and without interruptions (I have a large family with lots of wonderful children…but they can get noisy from time to time). Well, one contract ended, some small vendors that I was doing work for had budget issues and had to put work on hold and new clients were hard to come by in this economy. You can see how, depending on the timing, such an ‘expansion’ to a dedicated away-from-home office would have likely put me in the red quickly once these events started to happen. Luckily, I had stayed true to my planned business model of working remotely from my home office, keeping overhead to a minimum, minimizing my travel expenses, and focusing on the work and customer satisfaction and new marketing. And I was able to stay afloat and ultimately bring in new clients that filled in the gaps.
It isn’t always bad to expand. In fact, for many businesses it’s a necessity or they’ll never become profitable or be taken seriously. But don’t just expand for the purpose of ‘looking bigger’ or ‘feeling bigger’ or because you think it will ‘legitimize’ what you’re doing. Stay true to your business model and your business customers and your profit margin. Growing too fast can cause your business to over commit revenue that is needed to sustain business and can cause you to fail for no other reason than you just expanded when you should have maintained.