The first rule of business success is: Don't Fail. If you fail, you'll never be successful. Sounds obvious, doesn't it? How many of us study the reasons for business failure in order to avoid it? Automotive safety engineers study car accidents in order to prevent future ones. For the same reason, you should learn about business failures in order to prevent a future one - yours!

Every year about 100,000 businesses in the United States fail. Dun & Bradstreet develops statistics on business failures that are updated yearly. While the percentages vary a bit from year to year, the reasons for business failure go something like this:

Disaster - 1 Percent. Some business failures are caused by fire, flood, or acts of God. No firm should go out of business for these reasons unless they have totally inadequate insurance protection. In 1980, when my small business was struggling to survive, a local pharmacy had a big fire. The owner was well-liked in the community and people took up a collection to help him rebuild. It was good he had made a lot of friends in town. I never contributed a dime. Even though I could barely pay myself a salary, I bought fire insurance on my business and disability insurance on myself and my partner. The pharmacist decided to forgo this to save a few bucks and, in my opinion, deserved to suffer the consequences. Enough money was raised so the pharmacist was able to rebuild and reopen. He continues to operate the business to this day, thanks to generosity and luck. Let's hope he bought some insurance this time around.

Fraud - 2 Percent. This means someone is stealing money from the company, usually a dishonest business partner or bookkeeper. I've met several people whose companies have been defrauded in a big way. In every case, they failed to keep an eye on the financial aspects of their business. Because they didn't like to deal with checkbooks or columns of numbers, leaving it for someone else to do. They didn't just delegate; they abdicated. They never looked at the figures in order to develop a feel for how the business should be doing. They never put controls in place to prevent diversion of funds or property. They invited fraud by having their heads in the sand and now they are paying dearly for it.

Neglect - 4 Percent. I once had a very good customer who was running a multi-million dollar wholesale business in the South. He had founded his business in the mid 1950s and had built it up from nothing. In the late 1980s, he decided he had worked long enough and moved to a resort area over a thousand miles away. "I can run this thing by fax and phone," he said. He delegated everything to three long-time employees. The problem was that for 30+ years this guy had run his business like a paranoid tyrant. He never delegated anything. His people were never given the chance to test their wings. He never shared the secrets of his success or trained them to run his business. He suddenly left the nest and said to his people, "Learn to fly and run it yourself." They tried and crashed. In less than two years, the business was broke because of neglect. I've seen others do the same, abdicating to their employees who have been given no direction or training. Fraud and neglect come from the same source - an unwillingness to face reality.

Lack of Line Experience - 10 Percent. In these cases, the owners have insufficient experience in their lines of work. A carpet cleaner who doesn't know how to clean carpets. A printer who doesn't understand the printing business. A technical writer who has a lousy writing style. You've probably experienced this kind of thing personally, wondering how a restaurant with such poor food can stay in business. The truth is, if they don't learn to serve good food before their savings run out, they'll be out of business. I know a woman who owned an upholstery repair business that she knew little about. When she went out and made calls on used car dealers to bid jobs, she frequently misquoted and misinterpreted what was needed. When her employees went out to do the work, they often took twice as long as she had figured. Therefore, many of the jobs were money-losers. Many of her customers were unhappy because she gave them unreasonable expectations about finished appearance. Her employees couldn't deliver on her promises and would end up arguing with the customer. Those customers took their future repair business elsewhere. She wouldn't take the time to learn the aspects of her business that she needed to know to do estimates properly and she soon went broke.

Unbalanced Experience - 22 Percent. Undoubtedly you've heard of businesses where the owner was a great salesperson but knew little about cost control and kept losing money until the business went under. Or a business where the owner knew a lot about accounting but couldn't sell his or her way out of a paper bag. The business never brought in enough revenues to cover its monthly operating costs. The company finally went under. Failures like these are the result of unbalanced experience on the part of the owner or manager. To successfully operate any business, you've got to bring a variety of skills to the table. You've got to wear several hats - salesperson, financial analyst, purchasing agent, personnel manager and more. Having skills in a single area alone isn't good enough. You've got to be flexible and versatile.

Managerial Incompetence - 61 Percent. Management is defined as the skillful use of resources to accomplish a purpose. Most small businesses have very limited resources, like money. It is, therefore, critical these limited means be skillfully used since there aren't any extra to waste. Most managerial incompetence is a combination of lack of skills and a poorly defined purpose. In the fall of 1957, when Ford Motor Company introduced the infamous Edsel automobile, they had ill-defined objectives and a lack of commitment to the project. Both of these problems ultimately killed the car. (Even though the Edsel died, Ford Motor Company itself survived because it had lots of money left to spend on more successful ventures - like the four-seater Thunderbird, introduced the same year.) Big businesses can risk high dollar amounts on a project because the money spent is a relatively small portion of their total resources. Small businesses can't do this. Their assets are too small. They have to make good decisions. Many small businesses fritter away their assets because they make lots of bad decisions or, in some cases, no decisions.

A client once said to me, "Life is unfair. I'm the best decorator in this town but I'm barely making a living at it. It shouldn't be that way." This is a good illustration of the symptoms of business failures listed above. My client's technical competence as a decorator only gets her 10 percent of the way toward success. There are several reasons she's not successful. First, she has unbalanced experience. While she's a good decorator, she does a bad job of quoting. On some potentially lucrative jobs she wildly overbids and fails to get awarded the contract because her price is too high. On others, she underestimates how much time the job will take and ends up losing money. She has demonstrated lapses in managerial competence as well. She operates on a very limited advertising and promotional budget yet spends her ad money irregularly and emotionally, responding to the sales pitches of advertising reps rather than analyzing what ads work and what don't. She has no idea how new clients find out about her because she never asks. She is guilty of neglect, too. She always procrastinates and files her taxes late, which increases her cost of doing business because she's always paying penalties and late charges.

You may have heard the old saw, "If your business makes it through the first year, you'll succeed." Baloney! Less than 15 percent of all full-time, licensed businesses fail in the first year. About a third of all new businesses close their doors in the first three years. Yet 25 percent of the businesses who fail each year are more than 10 years old. In order to be successful over the long term you must be ever-vigilant. You can't get sloppy after a few years and expect your business to automatically prosper in the future.

Speaking of baloney, you'll occasionally meet former business owners who will tell you, "My business was doing fine until the recession came along and wiped me out." Here are the real facts about business failures during bad economic times. Business failures typically average four to five failures per 1,000 businesses in any normal year. That's a failure rate of one half of one percent. In the recession of 1981 to 1983, the failure rate increased to nine out of 1,000 businesses. That's nine tenths of one percent. During the Great Depression of the early 1930s, the annual failure rate was even higher - 12.5 per thousand. That's only one and one quarter percent. This means that, even during this awful economic period, 98 3/4 percent of all businesses did not fail each year. They survived. Only the ones which were already weak due to managerial incompetence or other shortcomings went under.

Pay attention to the principles, guidelines and suggestions made here. They'll help you prosper. And prevent you from failing.