I wrote an article here a while ago pleading for business owners to take a more proactive role in igniting our lethargic economy ("Heal Thyself Small Business and In-Turn Heal This Economy - What Small Businesses/Start-ups Can Do to Prevail Again and Rescue our Economy") by simply running their businesses better. Embedded in that article was an analysis of why businesses fail at the rate they do and how a business plan or strategic plan may change this sad statistic. I have referred so many to that portion of the article that I thought it might be more helpful to extract that portion and give it its own headline. Here it is:

According to Gallup, in 2008 a milestone occurred in our history - more business are failing than are new businesses entering the market.

Why are they failing?

To fix the problem we have to understand the problem. Let’s first discuss business failure rates. According to the Small Business Administration, a business started in 2004 has a 48% chance of still being around today - half are gone. The number-one reason businesses fail is rather obvious:

They run out of money.

But how does this occur?

Try these reasons (compiled research of Moya K. Mason, “What causes small businesses to fail.”) :

• Choosing a business that isn't very profitable.
• Inadequate cash reserves.
• Failure to clearly define and understand your market, your customers, and your customers' buying habits.
• Failure to price your product or service correctly.
• Failure to adequately anticipate cash flow.
• Failure to anticipate or react to competition, technology, or other changes in the marketplace.
• Overgeneralization - be everything to everyone.
• Overdependence on a single customer or customer set.
• Uncontrolled growth.
• Believing you can do everything yourself.
• Putting up with inadequate management.

This list is very comprehensive and accurately captures what I have observed consulting for established businesses and startups alike.

Sadly, these are all preventable.

Everyone of these causes are preventable, if only business owners/founders would follow the very basic rules of business - the very first of which is have a 3-yr plan, or in the case of a startup, a business plan (before you launch).

Unfortunately, a war is being waged against business/strategic plans.

There are folks out there, especially in the startup world, who are advocating that business planning is outdated. Want an example? Here is an entry from one such “expert” who titled his blog, “Why you Should Ditch Annual Business Plans”

"Business planning is broken. In a world that is constantly changing and increasingly complex, business leaders can’t plan for a predicted future anymore. By the time an annual business plan is ratified the market has moved on to places that nobody could have imagined. If businesses are unable keep up with changing customer needs they stagnate or decline.

Leaders need to abandon traditional business planning and embrace the creative process instead. Business plans should look more like sketchbooks than spreadsheets. What do sketchbooks do? They help artists unlock ideas, to experiment and learn, to stretch boundaries, and to build talent. Artists take their best ideas from sketchbooks and use them to create their best work.

Businesses should operate as a similar collection of experiments. The testing and refining of new growth ideas ensures a constant connection with a changing customer base. Aggressive growth happens when leaders are able to continuously shift investment to those ideas that show the most promise."

His contention, like so many taking this position, is that the marketplace is changing SO rapidly it is just not possible to plan. He is also suggesting the best and most respected business owner (CEO) is the one who stands up in front of his/her employees with his "sketch book of ideas" on where he is taking the business. Really?! Most respected?! Do you want to follow this leader who is leading simply with a collection of ideas? This is all utter BS (sorry) and this mindset explains in part the sad failure rates for startups and established businesses alike.

Let’s look at what I advocate are the very basic elements of a business/strategic plan - the questions that should be answered on paper before the very first dime is spent:

• What basic human problem am I solving?
• Is my solution unique?
• Do people want to buy my solutions? What people? Where is my proof?
• How big is the marketplace that I am selling to?
• Who are the competitors/trends I should pay attention to?
• What skills/people do I need on-hand to sell and deliver my solution?
• How many widgets will I have to sell to cover the costs to produce these and be cash-positive?
• How long can I operate with cash on hand?

If you look at these 8 questions, and compare them to the reasons for failing, you have to wonder, "Why do business owners/founders fight this basic rule of business?". I‘ve heard a few excuses over the years (see "8 Shortsighted Reasons Business Owners Don’t Plan"). The failure rate of startups and established businesses alike are continuing to prove that entrepreneurs are fighting one of the basic rules of business - and losing.