2 Ways to Fail in Business and the 1 Way to Grow a Business

Leo Tolstoy opened his novel Anna Karenina with the line: “Happy families are all alike; every unhappy family is unhappy in its own way.” Success and failure in business share a similar principle as Tolstoy’s novel: successful businesses share one common characteristic; business failure comes in many flavors that fall into one of two categories, including failure to follow the one trait of all successful businesses.

The first broad category of business failure can be summed as “too little business.” Of course that makes sense. If you don’t have enough business, hence revenue, the business can’t afford to pay its bills.

The second broad category is not so obvious: too much business too fast.

At first blush you might think this is 100% wrong. Microsoft, Apple, Tesla and many other large companies had massive growth early on and did well. The problem we suffer from is survivor bias (we see the handful of winners and can’t remember the failures from this category because they are not household names).

A deeper discussion on the two ways to fail in business are in order.

Two Ways to Fail in Business

Not enough business: What is “not enough business? Is it zero? That would be easy to see why this type of business failure happens.

Not enough business is more nuanced. A restaurant filled to capacity might fail due to lack of “enough” business. Another restaurant in the same situation might have the opposite problem.

Let me share live examples from my office.

I currently have a client working hard to build a tea and dried fruit business. (For the record, I am talking about my oldest daughter, Heather’s, nascent business.)

This is her first year in business and she is still learning business basics. The goal was to grow all her own variety of teas and fruit, along with selling all her product through farmer’s markets, fairs and an internet website.

She did all the right things to get started. She has taken several classes on the subject and continues to spend time on training.

However, I warned her she has an issue. She wants to control the entire process and that is difficult even for large companies. Either grow the product and sell wholesale or buy wholesale and repackage for retail sale, was my advice.

As we head into the end of the year she is growing fast. But. . .

Heather took only half my advice. She still grows a lot of her own product because she has so many specialty tea flavors, many of which are hard to find wholesale. Plus, her home grown teas have so much flavor people start opening their wallet as soon as they smell her tea and a sip is all it takes for the customer to hand their money over.

This may sound like an example to too much business. Closer examination will prove the opposite.

We live in NE Wisconsin. The growing season is short. Home grown supply is a problem in the winter. She has commandeered a good portion of the house with grow lights and has kept some supply growing, but this is still a limiting factor.

Heather has found suppliers so she can blend teas, focusing on home grown items that enhance her teas most and where outside sources don’t exist (her specialty blends from selective breeding).

Here is where the problem reaches a real bottleneck.

Sales are good at farmer’s markets and fairs. She even sells in churches and other venues. This takes a lot of time on one hand, but does not push the business to a level of profitibilty necessary to live even a modest lifestyle. (Good thing she lives with us or the dream would be toast.)

This is a prime example of a full restaurant suffering too little business to survive. Seating might be too limited to reach a critical mass. What to do?

One plan for the restaurant that is too small to ever make it to a reasonable level of profitability is to focus on take-out orders or delivery. Several restaurants in serious financial trouble reached the promised land when they entered my office. It takes critical thinking, but it does work.

Back to the tea business. Upfront, I made it clear to Heather this will be a tough road. Repeat sales are a must and she needs to get her specialty teas in coffee and tea shops around the area and more. She needs to build a mailing list, have monthly offers and deals to spur sales.

The biggest problem I see is economies of scale. As is often the problem in businesses with too little business to survive, scalability tops the list. Some businesses, at their most basic, will never succeed. A new way of thinking can break the failure pattern and create a real opportunity for real success.

We will return to Heather’s story later when we discuss the trait every successful business has.

Too much business: It seems like a good problem to have: too much business.

Scalability rears its ugly head again with this business failure issue. Apple, Microsoft, Tesla and many other super-fast growing businesses have scale advantages.

If Apple needs more iPhones it calls the factory and orders more. If Microsoft has more orders for Windows they just add a server for the additional internet deliveries.

Now take a client from a few decades back with a roofing company. He did good work at a reasonable price. Orders soon followed until it was an avalanche! Crews were working longer hours than safe to do and the owner was working 20 hour days. Burnout and lower quality had to follow.

And it did. The workload increased even more as errors needed correcting.

With no spare time to manage his company it began to spin out of control. I begged the owner to turn business away. He didn’t.

Then he stopped doing the bookwork, payroll deposits and filing of tax returns. And just like that, too much business ended a promising business providing high quality to the local community.

Some businesses are more prone to “too much business” problems. Doctors, attorneys, accountants and tax professionals have almost no ability to scale. The top notch doctor can do only so many surgeries in a day. There is a limit and the talent specialists have is difficult to scale.

A perfect illustration of this is H&R Block and Intuit, the maker of the DIY tax software TurboTax.

H&R Block can only grow by adding more offices, raising prices, and by hiring more tax professionals, of which, quality tax pros are hard to find. Intuit, on the other hand, can handle just about as many tax returns as it wants since the client does all the work. If too many people show, add another server and they are good to go. One can scale easily, the other not so much.

The stock price bares this out. Block hasn’t doubled in the last 5 years while Intuit more than did so. The only thing hurting Intuit is the Inflation Reduction Act adding funds for the IRS to provide their own free DIY tax software in the near future. Another indication at how easy some things are to scale.

Intuit also works in accounting software: QuickBooks. Again, a very scalable product, all delivered via the internet.

Perhaps the best example of too much business hits very close to the author.

My tax practice joined the business world as a part-time side hustle in 1982. By 1989 I had the bright idea I can do this full-time as a career. And so I did.

A few years later I was an enrolled agent (a tax professional allowed to represent clients before the IRS in audit and other issues) and a store front.

The part-time client list of fewer than 50 tripled the first year, then tripled again. Nearing 500 clients I had a profitable business that then grew at a manageable rate. Twelve years later I had 2,000 clients and a busy building during tax season and more modest business activity and staff outside tax season for payroll, consulting and other business services.

Armed with experience, my practice could handle just about anything sent its way. Since I consulted with businesses it was a good idea to possess the talents I actually preached.

Until 7 years ago.

Some ideas are better than others. Coupled with a talent for growing business even when not trying, a ticking time bomb lurked below the surface.

Eight years ago I ran across a blogger with close to 10 million pageviews per month. I loved his work and his ideas on frugality and handling of financial matters. He was going to be at a social gathering and I had an idea I wanted to present to him.

The social gathering was over a 4-day weekend (Memorial Day here in the states). Several of the attendees gave presentations. I thought it might be a good idea to share some ideas as I built rapport with the blogger of interest.

As luck would have it, I was the first to present. And the blogger sat straight in front of me.

It might have been something I said or the passion I have for my work. In either case, 15 minutes into my presentation the blogger interrupted me and said I was his new client. And so it was.

So far the risks were minor. The odds of my practice taking a new growth trajectory were slight. That is until the blogger was excited to share the story with his audience.

The story hit his blog the following February, just as tax season was getting into full swing.

I had already decided years ago to serve fewer clients at a higher level and to work with larger clients. The office now saw only1,200 clients per year which meant I could touch base with a large percentage of clients, even the ones working with other accountants. (I like my clients and enjoy keeping up with their story and goals.)

Then the blog post hit. There was no advance warning. All parties involved had no idea what happens when a low scalable business meets a national demand.

The moment the blog post went live my email lit up. There were zero firewalls in place for wave after wave of demand.

The first day there was an estimated 3,000 emails. A year later 300 emails a day, even during the slow days of summer, was still common.

With all my experience and supposed talent, I found myself with “too much business” coming in “too fast” and no way to turn off the spicket.

If it weren’t for my experience my business would have folded. It took years to erect the proper firewalls and right the boat. If this would have happened earlier in my career I would not be here speaking with you. It was that disruptive. There were just not enough tax professionals available to hire to handle the traffic surge. Other solutions were needed.

The key takeaway again is scale. If I were Bill Gates I would have added another server and sold more copies of Windows. As a tax professional with thousands of people thinking I was the only guy on Planet Earth that could help them, scale was an issue! No one gets more or less time than anyone else in a given day. No one! It is a universal limit.

Now we turn to the one solution, the one common trait among all successful businesses. A trait that bailed this accountant’s tail out of a deep quagmire.

The One Trait All Successful Businesses Possess

Why did my business survive a “too much, too fast” scenario? Will my daughter’s business find a way to the promised land of significant profits? What could have saved the roofing company? The restaurant?

Every business faces challenges. To paraphrase Tolstoy: All happy businesses are the same; all unhappy businesses are unhappy in their own way.

The “happy businesses are the same” comes down to a plan. Preferably written.

While I had no idea what was about to happen when national exposure to an audience of 10 million hit, I did have a plan. The plan needed serious modification. But I did have a very detailed and thought out plan. A plan that was constantly worked and reviewed.

Without the decades of constant planning, it is unlikely my skills would have been honed enough to survive.

Heather’s tea business is less than a full year old, yet she has a detailed plan that is flexible; she built in the ability to change with her business’s dynamic. And it shows. Somebody’s daddy, an accountant I might add, did not think “tea” was a viable business idea. Well, you can sell a heck of a lot of tea if you have a plan. Who knew?

Plans come in different flavors. Like tea.

One planning tool is budgeting. Early in my tax practice (the first year) I did as much work as I could to develop a baseline. The goal (budget) each year was to increase revenues over the prior year while keeping expenses below. I never got more involved in budgeting than that because too much budgeting is really wishful thinking rather than a plan.

One of the most important parts of your business plan involves differentiating your business from the competition.

Many a client has entered my office with the idea of opening a restaurant. As I point out the risks of restaurant ownership, the magical phrase, “Everyone has to eat.” comes out. To which I reply, “Yes, but not at your restaurant.”

There are restaurants everywhere. You can differentiate with the food offering, but this has a natural limit. Better yet, differentiate in the service area. While anyone can do it, few restaurants provide a true dining experience. Those that do pack their establishment.

Which brings up another point. If your restaurant has limited seating (all do), the only way to grow the top line is to raise prices (inflation and competition will limit this in large part), stay open more hours (still a scale issue since all you get is 24 hours a day and many of those hours will not be prime traffic hours), increase takeout and delivery or open new locations.

But this might be the wrong way of looking at the issue. Yes, the top line is important. But the real focus needs to be the bottom line. Adding more hours might increase revenue while lowering profits! In other words, there might be hours when you lose money. Once again, it is scale. The prime dining hours are limited. There are few ways to slightly increase the prime profit hours of a restaurant.

Unless you differentiate with the competition and provide a dining experience people are willing to pay more for. Of course this means your “plan” needs to include something more than hours open and food choices.

People will spend more time at your restaurant if you provide an experience and good food. That means fewer opportunities to make a profit (customers occupy a seat longer on average). But! People are willing to make reservations, dine over a longer dinner period (3 to 10 versus 4 to 7; 7 hours of prime dining hours over 3) and pay more.

Each customer is more profitable and you serve more customers due to the expanded hours. That is a plan for a successful restaurant.

What about Heather and her tea business? Well, the biggest problem she has is that she can only be in one place at a time. When selling tea at a farmer’s market she isn’t developing product or doing anything else to grow the business. She is limited by how much it is possible to sell on any given day at the market.

Of course, she needs repeat customers. That is already happening and she is building a mailing list. Small orders from end users are nice. Still, you need a lot of $50 orders to reach critical mass (profitability at a living wage or higher).

As much fun as farmer’s markets and similar venues are, they are a huge time sink with limited upside. Yes, she can expand beyond local markets into more high volume venues, but this always ends with a scale issue as well.

Unlike her dad, Heather can build a plan that mitigates many of the scale issues.

Advice from her accountant is simple. She needs to sell to coffee shops and other outlets. She needs to create a brand so people don’t buy her product because it is cheap, but because it is a superior product people want above all other options. She needs to create an experience. And tea, yes, tea! can do that.

Final Lesson to Grow a Business

It only happens with a plan. You can get in your car and drive, but without a destination in mind and a plan to get there, you will end up nowhere fast.

Every successful business to grace my practice had a plan.

Some plans were as formal as a business plan presentable to a bank or SBA. These tend to be rigid plans and has the serious flaw of limited flexibility.

Often times successful business owners have handwritten notebooks filled with plans and spreadsheets on their computers bringing all the details together.

Flexibility is key. Without the ability the adjust, a business is one step away from disaster. Something as seemingly good as a blog post read by 10 million can be death rattle to the cast iron blob. It shatters instead of adjusting to the hammer of reality.

Instead, be like gold: soft and malleable. Because it is so easily formed into the desired end product, it glitters and shines; is desired by all. And valuable!

All happy families and all successful businesses are the same. Successful businesses have a plan that is flexible. You change. Your business will change. The world your business operates in will change.

A flexible plan is the only way for your business to flourish in good and difficult economic times.

And that is how you build a happy business.