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:
- 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.
- 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.
Maintaining Work/Life Balance (When You Work From Home)
With the increase of mobile technology and the high cost of office rentals, it is increasingly common for small business owners to work from home. And since they’re their own bosses, those entrepreneurs can get left out of the discussion of how to achieve work-life balance. After all, how do you “get away from work” when work is where you live? In this article, we’ll discuss some steps that can be taken to maintain work-life balance when working from home.
1. Have a separate space.
If possible, keep one room in your home dedicated exclusively to work. Don’t do work anywhere else in the house, and don’t do leisure in that room. It’s too easy to take a break from playing a game or watching a show to “answer a few work emails real quick”. (Likewise, it’s too easy to check on Facebook mid-conference call.) If you make a space just for working, it helps you to fully commit to what you are supposed to be doing at the time, whether that is working or relaxing.
On top of the mental and emotional benefits of having a dedicated workspace, there is a financial benefit. A home office deduction can be a huge boon at tax time and, per the IRS, is defined as, “Exclusive and regular use as the main place in which you conduct your business...”
Of course, not everyone will have the option of having an entirely separate room for a home office. If that’s the case for you, try to find a way to differentiate your “workspace” from your “living space”. Make sure that, when you’re working, your area is free of distractions. If you normally listen to Top 40, turn the radio to classical. You can even have a picture or two you set up on your desk, as though you were working at an office away from home. Just find a way, personal to you, to clarify in your mind that you’re currently “at work”.
2. Have set work hours…
Now, this isn’t to say that you’re required to work a standard 9-5. Many of us go into business for ourselves for the freedom and flexibility that comes along with being your own boss. However, not having a particular time set specifically aside for work tasks can also make it easy to procrastinate. Find a regular time, maybe daily or once a week, when you look at your schedule and map out exactly when you’re going to work on specific work tasks. And stick to it.
3. …And set leisure hours.
Again, this doesn’t mean you ignore a work emergency because you refuse to do business after 6. However, it is imperative that you find times when you focus your energies on something besides work (even if it’s just to focus on a tv show you really enjoy). Living and breathing work 24/7 is a good way to burn yourself out, and to forget what you enjoyed about your business in the first place.
4. Have someone keeping you accountable.
Everything in life is easier with a partner. Even if you are the sole employee of your company, you should have a friend or mentor who can give you the kick in the butt you need when you’re lacking motivation. (Of course, the various benefits of having a mentor are a different article for a different day.) Likewise, in your personal life, you need a friend who can make plans with you to have fun and relax, and who won’t let you off the hook if you try to bail for work reasons. Find a friend who will hold you to dinner plans, and who will confiscate your cellphone if necessary. (No work calls or emails at the table!)
Most of all, remember that, when you own your own business, you are in charge. It’s doubtful that anyone starts a business with the dream of working 60+ hours a week and never having a night out again. Remember what you’re working for, and go easy on yourself every once in a while. Work to live; don’t live to work.