There are a lot of statistics out there about how often small businesses fail, and they do not always agree with each other. Depending on who is doing the computing the numbers range from 33% to 75% of small businesses fail within the first 5 years. Also, these numbers do not represent the companies who do not fail, but are still unsuccessful – they limp along for years barely profitable.
But, no matter the actual numbers, what we do know is that building a viable, profitable company is hard, and most people cannot do it. There are many reasons, some out of their control, for this. But, fortunately, the basics of building a solid business can be taught to anyone willing to learn and apply them.
Here are 3 ways to create a successful small business.
Understand the financials
Cash is king. If you run out of it and cannot pay your bills the business has failed. The majority of owners do not understand this simple idea – volume is not profit, nor does it guarantee a positive cash flow. A $5 million job shop can fail faster than a $2.5 million one if the owner does not understand how to manage his cash.
Understanding the financials and using the information (i.e. margins, profit/loss, break even, productivity and cash flow) to manage effectively is key to staying afloat. Making money was one of the reasons you went into business, as you did not start a charity instead. Therefore, why would you be unwilling to learn how to determine if you were really making it or not?
Be willing to manage effectively
Entrepreneurs can be creative, driven and hard-working (the good). They can also be short-sighted, insular and inflexible (the bad). They are usually stubborn, unwilling to learn and know-it-alls (the ugly). No one is a born a fully formed good manager – we all have our strengths and weaknesses that help and limit our ability to lead others.
It follows that no one is born a fully formed good employee either. Just as you must learn how to be a good manager, the typical person must learn how to be a good employee. They must be trained, managed, rewarded and disciplined. It is naïve and a miscalculation of human nature to expect people to be any different.
Create and maintain systems
One of the main reasons owners start their companies is because they do not want to follow other people’s rules or systems. They want to be their own boss and accountable to no one. It is also one of the main reasons they fail. They are so rules adverse they refuse to put even the most minimal of systems in place.
The trouble is that most people, including owners, require structure and order to get things done. If there are no formal, effective systems in place then people (partners, managers, foreman, employees) will cobble together informal, ineffective ones – you included.
The positives of an entrepreneurial spirit can turn into negatives over time. Especially if you do not understand that we all have to keep learning and evolving if we want to compete and prosper in a rapidly changing world. It does not seem so, but sometimes it is harder to stand still than to move forward. How many times have you said, or heard other people say, “I really don’t know why I didn’t do this sooner.”
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:
