The Financial Reasons Small Businesses Fail

Almost every entrepreneur has heard the statistic:  80% of small businesses fail.  There are many reasons this happens, and can include everything from market slumps to lazy owners.  To enumerate every way a business can go under would be an endless, impossible task.

However, there are a few financial characteristics frequently found in struggling businesses.  Here are the most common financial reasons small businesses fail.

There's no plan.  It's not uncommon to meet new small business owners who have a brilliant product idea, a well-developed marketing plan, a slick website, and not one thought given to their budget.  We've already written on the tough financial questions to answer before starting your own business, but the importance of a solid financial bedrock cannot be overemphasized.  A well-researched budget and fixed goals is the key to surviving that crucial first year in which most businesses go under.  Great customer service and spot-on marketing are not enough to balance out shaky financials.

Speaking of customer service...

Poor credit management and pricing strategies are bad for everyone.  No one craves popularity like an entrepreneur and, when your business's success is entwined with how well-liked you are, the urge to avoid offending anyone becomes even stronger.  In the early days of a business, when there are only a few customers, there is a common impulse to let clients slide on late payments, or to offer frequent "friends and family" discounts.  It's easy to justify this with the logic with the idea that you need to establish customer loyalty, and you can tighten the reins a bit when you have a solid customer base.  There are a few reasons this doesn't work:

  1. Clients who don't pay on time aren't going to appreciate the slack you've given them in the past; they are going to resent the restrictions you enforce in the future.
  2. Likewise, your patrons who are just coming to you for the lowest price will quickly go elsewhere when your rates rise.

Lenient accounts receivable and cheap pricing might gain you a quick boost in early sales, but they are not a sustainable model.  Delivering a product you can be proud of, at a price that is worth your hard work and can keep your business afloat (and actually requiring customers pay you that fair price) ensures that your customers the pleasure of patronizing your business for years to come.  Because you have to remember...

Cash is king.  Yes, it's a cliche, but that doesn't make it any less true.  A great business model matters little if you run out of money before you can implement it.  Managing cash flow is key to not just the health but the continued existence of your business.  Here are a few of the most common cash pitfalls small businesses face:

1.)  Insufficient capital.  In all likelihood, your business will not be immediately profitable.  So not only do you need enough cash to get your business started, but you need enough to allow yourself to operate at a loss for a while.

2.)  Not having a large enough cash cushion.  Think "Princess & the Pea" levels of padding.  Regardless of how well you plan, the economy is unpredictable.  Look to history for examples.  No one expected the Boston Molasses flood which, in addition to the damage caused and lives lost, resulted in a nearly $11M settlement (in today's money) for the responsible company.

3.)  Over-investing in fixed assets.  It's great to plan for the long-term but, if you don't plan for the short-term as well, your business will not get a long-term.  Sacrificing too much of your cash for something like manufacturing equipment (even if you're getting a great deal) can hurt you, as that is not a liquid asset and will be of no help to you in the event of an emergency (i.e. your factory flooding a major metropolis with 2.3M gallons of molasses).  Think of it like a game of Monopoly; if you start building hotels too soon and suddenly need cash, you're stuck selling all your buildings back to the bank for half-price, and you know bankruptcy is right around the corner.  Only, in real business, instead of losing yet another game to your annoying brother-in-law, you've lost your entire livelihood.

Expanding your business is the ultimate goal, but maintaining cash flow gives you the solid foundation you need to build upon.

80% of new businesses fail, but that means 20% succeed.  To be that 1 out of 5, have a plan, know your value, and remain patient.  Better to start small and grow something big than to start too big and dwindle away.


Marketing to Customers (Who Aren't You)

Growing your business is an exciting challenge.  It's a time when you're ready to take on new customers, and you feel like you're ready for that "next step".

Of course, if you've been only working with a few close clients or through word-of-mouth, you may find it difficult marketing and networking with people outside your social circle.  That's understandable; it's easier and more comfortable working with people with whom you have a lot in common.

However, diversity amongst customers is necessary to really expand your business, and is a great way to avoid having all your "eggs in one basket".  But even mega corporations fall victim to major mistakes when it comes to marketing to a diverse audience.  Here are some "do"s and "don't"s for reaching customers who are nothing like you.

Do your research.

There is an enduring (if slightly ridiculous) urban legend about General Motors expanding into international sales.  The legend goes that attempts to market the Chevy Nova in South American countries met with failure because no va in Spanish means "doesn't go".

According to popular web aggregator of urban legends Snopes.com, this tale is a myth.  And, upon further inspection, that makes sense.  After all, even in the '70s, surely GM would have had someone fluent enough in Spanish to alert higher-ups about the possible translation issue?  Besides, even if the Nova legend were true, we savvy businesspeople of the 21st century surely know better now.

Enter, Twitter.  Though most Americans have a passing colloquial knowledge of Spanish now, in the digital era, technology has created a communications gap that spans generations instead of nationalities.

Now, there have too been too many Twitter scandals to ennumerate, but a recent marketing disaster illustrates just how bad it can be when a company tries to hitch onto a trend they haven't fully researched.  When the #whyIstayed hashtag began trending, with former victims of domestic violence listing the reasons why they didn't immediately leave abusive partners, pizza company Digiorno tweeted, "#whyIstayed You had pizza."

Of course, Digiorno did not mean to make light of domestic abuse, and immediately issued an apology with the explanation that they hadn't read what the hashtag was about before posting.  So failure to perform roughly 30 seconds of research resulted in a marketing disaster.

Don't be needlessly specific in your marketing.

Companies often seem to think they need to change their message in order to reach a new audience.  Here they enter a minefield of marketing hazards, frequently falling prey to tropes and stereotypes, alienating the people whom they'd wished to include.

We have Bic to thank for the most hilarious trainwreck in unnecessarily-pointed marketing.  When Bic came out with a line of "For Her" pens, they were flooded with sarcastic Amazon reviews.  Customers rightly (and very snarkily) questioned why men and women would require distinct writing utensils.  Bic's attempt at marketing toward a specific audience had unintentionally come across as condescending and ridiculous.

Whoever the customers you're trying to reach are, your company hasn't changed.  So instead of changing the message about the benefits and values of your brand, change your marketing channels.  Advertise in different channels, or across different platforms.  If you use physical signage or flyers, try different locations.  Just whatever you do...

Do be genuine.

Think back to your favorite high school teacher.  You're probably thinking of someone who inspired you; someone who took an honest interest in your goals and success.

Now think back to that high school teacher who wanted desperately to be liked by their students.  Who tried too hard to be cool by talking and acting like a teenage and, as a result, was respected by no one.

So frequently when companies try to market outside of their comfort zone, they follow the cringe-inducing pattern of the second example, awkwardly squeezing into ill-fitting jargon and trends.  I will never forget a local tv ad, infamous in our area, for its inclusion of a senior citizen quoting, "Whoop, there it is!"

The ad was for a furniture retailer, and I doubt they attracted any new young customers through that awkward reference to an outdated rap song.  They would have been better served by providing something relevant and of value, for instance, payment plans for customers without established credit.

When you look at it closely, marketing to a diverse set of customers really isn't that different from how you market to anyone.  By keeping the focus on your brand and the value you provide, you can maintain integrity and avoid any awkward pitfalls.


Tough Financial Questions to Answer Before Starting Your Own Business

Almost everyone, at some point in their lives, entertains the idea of starting their own business.  For most it's a purely speculative exercise, a fun "What if...?" daydream.  But for those who start seriously contemplating entrepreneurship, there are a lot of tough questions to consider.

Now, there are hundreds of articles out there with titles like "Do you have the mind of an entrepreneur?" and "Is starting your own business right for you?"  This isn't like that.  There's no personality quiz here, nor checklist of character traits.  This is because...

A.)  Those articles frequently aren't very realistic.  Personality quizzes don't work because not all businesses require the same personality.  Checklists don't work because everyone thinks they are "reliable" or "able to think outside the box".

B.)  We're numbers people.  Numbers don't lie, and neither do we.  So we're going to skip the fluff and go straight to the tough financial questions you need answered before you start your own business.

What is your break-even point?

Of course, there are lots of accounting questions regarding business entities, expenses, profit-margins, etc., but this is really the big one.  How much do you need in sales before you are making money instead of losing it?

You'd be surprised at how many people we meet who do not have this question answered, though almost everything hinges on it.  It really is necessary to know your break-even point because it ties your financials together and paints a clear goal.  Because, isolated from each other, numbers can be deceiving.  For instance, $100,000 in sales may look like a great success, until you compare it against $150,000 in expenses.  Likewise, even if you keep expenses low, if your sales are lower, you are still operating at a loss.  Knowing your break-even point lets you know exactly what your target is.

How long can you run in the red?

In a perfect world, every business would be instantly profitable.  Obviously, we don't live in a perfect world.  And, in our imperfect world, most new businesses take some time to hit their stride.

Early failure is, in some ways, a natural part of a new business.  When you're the new leader of a new company, it's a bit like going from playing a sport to coaching it.  Even if you're a professional, the strategies that worked for you as an individual might not work on a larger scale, and you have additional responsibilities piled on you as well.  Initial setbacks are to be expected.

"The most important thing for entrepreneurs is not to be put off by failure."  -  Sir Richard Branson  (Source.)

That's not to say everything is doom and gloom, however.  Many new businesses do go on to long-term success.  However, new businesses owners have to be realistic and be prepared to deal with and mitigate some degree of failure early on.

This is why it is so very important to know how long your company can run at a loss.  Too many new business owners, clouded by the dream of their assured success, expand too aggressively and wake up one day to find their capital is gone.  Knowing in advance, "I can operate at x loss for y months," can help you set goals, know when to cut back and, in general, prepare for the unexpected.  (And with a new business, the unexpected is inevitable.)

What's your exit strategy?

In fact, according to data strategist Thomas Thurston, somewhere between 70%-80% new small businesses fail within their first 10 years.  (Source.)  That leaves, at best, a long-term success rate of less than a third.  And, according to the SBA (Small Business Administration), 552,600 new businesses opened in 2009, but, that same year, 660,900 closed.  (Source.)

Obviously, losing a business is hard, but not being prepared can make it even harder.  For example, something as seemingly simple as how you register your business entity can affect whether your personal assets are at risk in the event of a closure.

Now, hang on, because we're getting to the bright side.  Maybe you're going to leave your business because it's so successful.  You want to cash-in, leave behind the stress of running the show, and go retire to an island.  Well, you still need an exit strategy for that.  How you set your business up in the early days can affect how much reward you get for the years of work and risk you invested in it.

In fact, we frequently advise our clients to always, regardless of their long-term plans, keep their books as clean as though they were planning on selling the company.  As we mentioned in the previous point, life, inevitably, happens, but the unexpected is much easier to weather with pristine financials.


The "First-Date Effect": Are you treating new clients like a long-term relationship, or a one-night stand?

Business partnerships, like any other relationship, can be very exciting in the beginning. You meet someone new, and the two of you click. You're on the same page, you have the same vision...You just get one another. Contracts are signed, meetings are arranged and, for a while, the two of you work happily in sync.

Then, something happens. Maybe they're your financial planner, and they stop answering your emails in a timely manner. Or your IT services provider shows up to your office dressed a bit more casually than you're comfortable with. You ask your marketing representative whether you should re-design your logo or leave it as is and they respond with, "Oh, whatever you think is probably fine."

When you first met, you fell in love with their customer service. But now? The thrill is gone, baby.

You don't like being treated like a sure thing, so you know your customers don't either. Here are some ways you can keep the spark alive with your clients so you know they'll stay loyal to your business.

Stay in communication.

Let's say you go out to dinner on a romantic date. You have a nice time, and think the other person did, too. You call them the next day and leave a voicemail thanking them and asking if they'd like to go out again sometime.

Then you wait. And wait. Three days later, you just get a text reading, "sure sounds good".

You probably wouldn't be too impressed. You definitely would feel like they were not as invested in the relationship as you. It's the same way customers feel if you don't respond to communications from them in a timely and appropriate manner. Some general rules:

1.) Respond via an appropriate medium. In other words, unless specifically indicated in the voicemail, don't respond to a phone call with a text or email. If they consider an issue important enough to warrant a phone call, and you shoot back with a casual text or email, it implies that the problem isn't as important to you as it is to them.

2.) Be timely. Don't leave someone hanging, waiting for your response. Many business etiquette guides advise responding within 24 hours to all communications. Faster is even better. If you are trading emails with a client as the two of you collaborate on a project, don't just log off at 5:00 and drop them until the next afternoon. If you have to attend to other business (even if that "business" is really just "having a personal life"), let them know that you have to run for a bit, and then resume communication with them as soon as you can the next morning.

3.) Be professional. This shouldn't have to be said but, sadly, it still does. No matter how friendly your client is, no matter how much you like each other, your communication still has to be professional. Every email doesn't have to include an attached notarized PDF copy in triplicate, but it does need to be free of spelling and grammatical errors. Taking the time to make sure your communications are professional is a sign of respect for your client.

While we are on the subject of professionalism...

Stay attractive.

One of the cliches of romantic comedies is a couple experiencing tension because of complacency in the relationship. At the beginning of the movie, when they fall in love, they go out to five-star restaurants in formal wear. The second act features them eating take-out on the couch in sweats.

When your customer service starts slipping, it is the metaphorical equivalent of you showing up to the client site, wearing sweat pants and eating pizza. (Also, please don't literally show up wearing sweat pants and eating pizza, either.) If you don't provide the same quality of service you did at the beginning, it makes your customer feel taken-for-granted, and like you misled them with false advertising.

Your business should always strive to grow and improve, and your customer service along with that. If you want to really shock your customers, surprise them by providing exceptional service, even above-and-beyond the high level they've come to expect from you.

Stay interested.

Nothing makes people like you more than when you make them feel attractive. Just like you try to remember your significant other's birthday or favorite dessert, your clients will be flattered if you can remember the intimate details of their business. You do not want your client to have to remind you of items discussed at prior meetings, or current issues being faced. No matter the size of the company or how much income they bring you, you want each client to feel like they are at the forefront of your mind.

There are small things you can do to make your client feel significant. This could be something as small as tweeting them a relevant news article, or as large as arranging a referral meeting to help them earn new business. By going above-and-beyond the minimum which is required of you, you can help ensure a lasting client relationship to profit you both for the long-term.


Nice Guys Finish First

Anyone who knows us here at The Bookkeeper knows that we’re a pretty friendly bunch. That extends to all aspects of our lives, most notably in the way we do business. We do not care for the cynical “nice-guys-finish-last” mentality, which opines that success requires selfishness and back-stabbing. We firmly believe that kindness and goodness take you farther in business and in life.

Not buying it? Check out our tips on how to make niceness work for you.

1.) Be nice when you network.

networkYou may have also heard this phrased before as, “Don’t be interesting; be interested.” People remember the people who make them feel important, much more than the people who are just trying to look important. Imagine that you’re out at a networking event and you meet two people in identical fields.

Person A bounces around the room like a ping pong ball, making his introduction (really more of a pitch) so fast he doesn’t hear your name when you respond. He’s already moved on to his next scripted paragraph, explaining why his company is the best and how you need him for your business. He shoves a business card in your hand and tells you he’ll see you at coffee next Tuesday morning. (Did you agree to an appointment? At this point you’re so overwhelmed you’re not even sure.) Before you can open your mouth to say that Tuesday isn’t a great day for you, he’s spotted another mark over your shoulder and is striding off.

You may meet Person B later in the night. He has the same profession as Person A, but never mind that; he really wants to hear about what you do. And he actually listens when you tell him about your business. In fact, he knows someone in a complementary field who could be a really good referral partner for you; would you mind if he introduced you two? At no point does he try to sell you on his business. If you express interest in enlisting his services, he’d certainly love to follow up with you, but he lets you make the first move. Overall, he seems like he is genuinely just there to help.

So, who would you rather do business with? The nice guy, right? And if you want to work with nice guys, then everyone else probably does, too. So be the nice guy.

2.) Be nice even without the potential of reward.

meetingYou really can’t fake niceness. People can smell insincerity a mile away and we’ve all known that “friend” who only seems to come around and be helpful when they want something. True kindness is a way of life.

Here’s a real-life example (and, I won’t name names, because he’d be embarrassed if he knew I wrote this about him): I know someone who is an expert with a certain type of software. (We can call him C.) A friend-of-a-friend he’d been introduced to a week or so earlier contacted him one day about a glitch he was experiencing with the program. This man wasn’t a client, nor even a close friend; just someone he’d met once. But he spent a good part of the day emailing with the guy and trying to find out the source of the problem. They found a solution, the problem got fixed, and C forgot all about it.

A month later, the man he’d helped shows up at a networking meeting. With no prompting, he spoke up and gave C a huge kudos, and encouraged anyone who was looking for those type of services to go to C. He even said, “This is the man you want to do business with.”

He didn’t have to do that. C never said, “Sure, I’ll help solve your problem, but you’d better get me some business out of it.” He did it just to be nice. And would do it again, even if the favor hadn’t been repaid.

Because, when you’re nice, you…

3.) Do it for you.

wonderful-life2Legendary basketball coach John Wooden once stated, “You can't live a perfect day without doing something for someone who will never be able to repay you.” This can be especially true for those of us who go into business for ourselves. Entrepreneurs and small business owners can get a bad rap, as being either bloodthirsty financial sharks or paranoid penny-pinchers. But cynics aren’t the ones who start new businesses. Optimists and dreamers are the ones who launch new ventures and, while everyone would enjoy making a lot of money and becoming very rich, it’s rarely the main goal. People go into business for themselves to do what they love, to create something new and exciting, and for the freedom of being their own boss.

To look at it in (literally) black-and-white, take perennial Christmas favorite “It’s a Wonderful Life”. You can take the role of one of two* important characters in that story: nice guy and town hero George Bailey, or the miserly Mr. Potter. Only one of them is happy at the end of the movie.

* Okay, three important characters if you count Clarence. But we’re just saying you should be a nice guy; no one is asking you to be an angel.