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Recovering from Business Failures

An overview of business failures

In the world of small to medium-sized companies, there’s no such thing as too big to fail. Business failures can happen to anybody, and it’s unrealistic to think that you’re guaranteed smooth sailing.

Despite this, you have every right to be as positive as possible when building your company because the picture of small business failure isn’t nearly as bleak as it’s often painted to be.

Though most people have previously heard the often-cited claim that 90% of small businesses go belly-up eventually, the reality is much better, according to the official numbers. The Small Business Administration’s five-year survey demonstrates that only about 50% of new ventures failed during that time frame.

In other words, by baseline odds alone, you only have a one in two chance of hitting a fail point. And this doesn’t take into account the numerous things you can do to improve your odds of success and recover quickly even when things go wrong.

The following professional advice should boost your odds of success and help you recover much more quickly.

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Common types of business failures

Before we get to concrete strategies, let’s first briefly define the common types of business failure.

Preventable business failures

Possibly the worst but most common reasons for a failing business can be clumped together under the rubric of preventable failures. These are causes that you could have foreseen but didn’t take into account on time.

The most frequent of these include failing to use sound accounting practices, failing to finance your business adequately, hiring unsound team members or not analyzing your market well enough to adapt to its needs. With practical planning, preventable business failures can usually be avoided.

Unavoidable, complex business failures

Unavoidable business failures are emergent factors completely outside your control that arrived on the scene despite sound planning. An unexpected regulatory change in your company’s market, political instability, a drastic shift in the price of some underlying production commodity or a major financial disaster that destroys demand in your niche are all examples of unavoidable failures.

You won’t see them coming in most cases, but it is possible to adapt rapidly with corrective action when they emerge.

Intellectual business failures

These types of failures often result when a certain business strategy doesn’t match real-world results. They’re the best kinds of failure to deal with because they offer the most useful learning at the lowest cost and can usually be quickly corrected. Launching a new experimental product variant without experience is an example of an intellectual failure. Many businesses even embrace such failure as part of their evolution toward quality product-market fit.

Think proactively before failures start

Once you understand how and why businesses fail, preemptive steps for how to deal with failure right from the start are possible. This means thinking forward proactively and establishing a central vision of how you want your business to operate and how much you want it to grow by a certain time.

With proactive thinking, you accept that not all aspects of your business plan will pan out, but you still adopt a flexible attitude that lets you stick to a core vision. This should include a mission statement that lets you define strategic details and execute them quickly as your business moves forward.

The specifics of your products, services or your ideal niche might change as you grow, but your mission statement should lay out a clear vision of both goals and objectives, defined as flexibly as possible. Among these, you can include plans for:

  • The products and services you will offer
  • The niches you plan to serve
  • Your marketing and customer-hunting strategies
  • The essential pain points you will solve for customers
  • How you plan to deal with the competition
  • How you will structure your basic finances
  • What your basic organization will look like

By defining the above concretely but simply and with the possibility of modification, you can avoid the kind of planning blind spots and tunnel vision that can easily lead to preventable business failures.

Keep things as simple as possible

In both the strategic planning of your business structure and the handling of failures, keep your tactics as simple as you can. It’s commonly accepted in the business world that complexity breeds both fragility and more opportunities for failure. By organizing your finances, mission, marketing and business reach as simply as possible, you can reduce the chances of unexpected and preventable failures.

If failures arrive, the simplest, leanest possible business plan and organization will go a long way to helping you restructure and heal around the things that went wrong. You should be able to evolve and regrow your company into new directions and markets easily.

Identify what went wrong

When failure arrives, you should be ready to analyze its causes quickly and thoroughly to spot your key mistakes and change what led to them. This is where a powerful mix of keeping your business plan, organization and finances as simple as possible while also professionally documenting your operations can help enormously.

If your company is descending toward catastrophe, you need to carefully examine its finances, cash flow, revenues, marketing strategies and customer service to see which of these, if any, are leading to your business failure. The simpler these aspects of your operations are, the easier it will be to document and monitor them systematically. This, in turn, can make rooting out what went wrong much less time-consuming.

Use frequent SWOT analysis

SWOT stands for strengths, weaknesses, opportunities and threats. It’s a formal procedure for critically examining your business as it grows and keeping it healthy. SWOT helps you look at your company internally and externally to discover what’s working and what isn’t. The segments of the process break down as follows:

  • Strengths. These are the parts of your business that are working well and can be used as models for other aspects of your operations. Strengths could be particular products, product development, marketing strategies or other areas of potential growth.
  • Weaknesses. These are the parts of your business that are notably weak. They should especially be found and dealt with if they hinder something that’s strong in your business.
  • Opportunities. These are external factors that relate to your business in ways that leave room for new growth and future strategies. Work to find opportunities as quickly as possible with regular SWOT analysis, and implement procedures for taking advantage of them immediately.
  • Threats. These are also external but work as factors that can harm or even destroy your business. Competitors may be threats, but other factors outside your control, such as economic recessions, regulatory changes and political destabilization, can also be. You won’t always be able to stop all threats, but with SWOT, you can at least identify them and adapt your company to evolve around them.

SWOT should be a regular, fundamental part of your business’s documentation and failure avoidance strategy.

Set SMART goals for realistic strategies and achievable results

As an expansion on building your company with a simple, flexible mission statement and business plan, the SMART goals process focuses your entrepreneurial aims.

SMART consists of the following planning characteristics, and they’re crucial for clear-headed, concise strategy that avoids failure.

  • Specific. Make a clear statement of what your business hopes to accomplish.
  • Measurable. Break down what specific, measurable results you’d like to see financially or by other quantifiable definitions.
  • Achievable. Are your goals realistic and plausible given your resources as a business?
  • Relevant. Are your specific business objectives, strategies, tactics and operations aligned with your overall business vision? If not, they may be dragging your company down.
  • Timely. Define your deadlines for all major milestones in your business, and do your best to stand by them.

You can use SMART at any time in your company’s development. SMART works well both during the formation of a business and when it’s recovering from failure. However, you need a plan to put your SMART goals into gear. This means defining the specific steps you will take, acting on them and seeking resources or mentors who can help your company grow.

Use the power of advisors and mentors

Going it alone with your business failure is rarely easy, and this applies especially when you’re still inexperienced in dealing with unexpected catastrophes. This is why mentorship from someone with greater experience can be enormously helpful intellectually and a source of practical resources for recovery.

Your mentors can be other entrepreneurs or business executives. The most trustworthy mentorship will come from someone who is already a close friend with experience in your niche, but if you‘re not fortunate enough to know such a person, networking with like-minded people from the beginning of your business journey can help you create a rich web of potential mentors or supportive friends.

Cut your losses when necessary

One of the most painful aspects of dealing with failure in your business is that crisis point where you simply have to cut certain losses. Doing this may hurt, especially if you’ve invested years building your company into the shape it now has, but cutting away what simply isn’t working is often the quickest and simplest strategy for recovering from business failures.

Cutting losses can mean many things, and it doesn’t always require that you completely shut down your business and start over again. Instead, you might be able to do less drastic things like eliminating certain products that garner poor sales at high cost or firing team members who aren’t working out with your company. One common source of growth drag can be customers themselves. Often, a minority of a company’s customers create the majority of its revenue and profits. If you find this to be the case in your company, it might be time to recalibrate and discard what your low-revenue customers are demanding of you.

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