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Sunday
Aug282011

What makes small businesses fail? Is that really the right question?

There’s been a lot written on this subject,  but is that what we should really be pondering? Maybe we need to flip it around and ask, what makes small businesses successful?

One reason some do best is because they took the time to research several different ideas before starting up.  There must be a real need for your product or service, and the margins you can make must be worth your effort.   Nothing is more critical to your success than if potential customers are actually going to buy at the price that makes you a profit.   Many companies can’t make the revenue necessary because of competition, scale, location, knowledge, experience, costs, or high fees. Entrepreneurs might be great at their craft, but smart ones took enough time to find out if it was a viable product or service and what profit margin would it support.

Companies become successful when the model they create is correct for their product or service. Have you ever wondered why some companies that have the same widget are more successful than others?  I believe it’s because of the time and effort put in at the beginning to bring their service or product to market,  the way it is packaged or conducted and the marketing of their unique ability in that area has created an enthusiasm the customer can see and feel before making that leap of faith to purchase. Good companies spend time perfecting their product, system and procedures before they go to market.

Another reason businesses become successful is that the entrepreneur realizes that they can’t do it all.  They seek good counseling, they outsource areas that are possible, create alliances and move to a centric position to allow others to help the company grow.  They know that leverage is the key to taking the step from small business to larger growth and aren’t afraid to delegate to experts in their field. Did you know that a large percentage of entrepreneurs give up because they decided it was just too much work? Understanding the concept of leverage is critical.

They plan and set goals.  A company that doesn’t plan for success will not sustain itself.   Successful companies have a plan for what the company looks like in a year, two and maybe five. If you don’t, it’s going to look very similar to how it started out- light on policies, no budget, no systems and one or two owners working unsustainable hours with little or no time for working on the company or personal life.   Companies must be ready for growth before it happens. 

Successful companies know that the accounting piece is extremely important.  You can’t plan well when you have incorrect numbers or make good decisions if you are basing them on incomplete records. These companies know that a once a year visit with a CPA isn’t a substitute for weekly or monthly accounting. They create a budget each year, and they analyze the numbers.  They will hire and fire earlier because they can see the trends in the monthly financial reports. They look for operational problems and adjust costs earlier than competitors that wait till year end to see if they made any money. They ask and heed advice from their accountant throughout the year ( as an accountant,  there is nothing more disappointing than pointing out areas that can be improved to the client who’s asked your opinion, and after they confirm there needs to be changes,  watching them continue down the same old path to ask the same questions again the following year).

It’s important to smart entrepreneurs to constantly improve business knowledge, no matter how successful they’ve become.   They read business books, go to conferences with their peers, listen to other business owner’s problems and success stories and admit needing experts when appropriate.  They are willing and eager to change. They look for technologies that can help them run their business.

The final area that successful businesses seem to be better at is cash management.  They keep daily outlays to a minimum.  They know who owes them money, and set policies to receive it on time.  They pay their vendors in a systematic way, conserving their cash position.  They take advantage of discounts. They don’t pay interest on credit cards. They make sure there is a real return on investment of purchases.  They leave money in the company for raining days and growth by not draining reserves with large distributions. They monitor their balances to make sure they have enough cash on hand when necessary so they are never caught off guard.  They look at their planned growth to know if they will need a loan in the future, and start the process well before it’s time.  

These are just several of the area’s that lead to success for entrepreneurs running small businesses. Each business is unique unto its owners, but although each company is different, they are also very similar at their core.

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