By Paul Smith
Fargo Center Director of the North Dakota Small Business Development Centers
1. Lack of Focus
David Allen said, “You can do anything, but not everything.” Focus is not only having a clear idea of what your business will do, but equally important knowing what it won’t do. Without focus, it’s too easy to expend valuable time and resources chasing potential opportunities, which may or may not pan out. That’s why having a business plan is so important. Every company, regardless of the business stage, needs a business plan, especially start-ups. Most of us would never dream of building a house without a blueprint; that would be foolish. Why would a business be any different? According to research, those companies with a written business plan are 3x more likely to succeed than those without a plan. There are several different types of business plans, and the type of plan that’s right for your company depends on your objectives and audience. If your goal is to obtain a loan from a financial institution, you will probably need a more traditional detailed business plan. A good place to start is with a “lean plan” like the bplans (bplans.com) one-page pitch or business model canvas before developing a more detailed plan if needed. The important thing is without a business plan, you are more likely to veer off course.
Resource
Fortunately, there are some great business planning tools and templates out there like LivePlan, which make the process easier than ever.
2. A solution in search of a problem
In my role, I work with a lot of bright, innovative and inspiring entrepreneurs who have lots of great ideas for a new product, service or app. Many are understandably eager to push forward with development, but they often skip a critical step in the process – a thorough market analysis. Every business opportunity starts with people who have a problem or unmet need. The first step is to define the problem and how your business will solve that problem. Second, you will need to size up the market. Is there a demand for your product or service? How many people would be interested in your offering? Where do your customers live? How many similar options are already available to prospective customers in your designated service area? Are there enough potential customers who will allow your business to be profitable? A good market is one that is either large enough or has enough demand to be profitable – ideally both. Some of this industry and market data is available through existing free sources. The SBDC has access to additional resources, which require a subscription to sites such as IBISWorld, Vertical IQ, Bizminer and Esri. Perhaps most important, it’s critical to go out and interview and/or survey potential customers to validate the need for your offering and that customers will actually pay for it. Doing a thorough market analysis takes time but it will be time well spent in the long run.
Resource
The SBA has a list of free listing of business data and trends. You can find it by going to sba.gov and searching “market research competitive analysis.”
3. A focus on profit instead of cash
Many small business owners view their business through one lens – the income statement (P&L). Sales minus direct costs and operating expenses equals net income. And certainly, one of the goals of a for-profit business is profit. However, profit doesn’t pay the bills – cash does. A business owner needs to monitor the cash flow statement and balance sheet in addition to the P&L. If a business doesn’t have the cash to support its daily operations, the business will fail. That’s the main reason about 20 percent of startups fail within their first year, and only 50 percent are still in business after five years. Many of those businesses are actually profitable on paper but run out of cash. For example, the business may have recorded revenue but has to wait 30 days or longer to get paid by a customer so the business has a receivable on the balance sheet, which hasn’t been converted to cash. The company needs to have sufficient working capital to ‘cover’ those receivables until the cash is received. Startups need sufficient working capital to ensure the business can cash flow until it reaches the ‘break-even point.’ The SBDC can help them determine how much working capital they will need by doing a detailed cash flow forecast and break-even analysis.
Resource
The SBA has a list of free listing of business data and trends. You can find it by going to sba.gov and searching “market research competitive analysis.”
4. Unrealistic financial projections
Many startups assume their business will make money from month one and that they will be running at full capacity within three to four months. Some apply the “hockey stick” growth curve: Sales grow slowly at first, then shoot up with huge growth rates when “something” happens. The problem is, that “something” rarely happens, and the business doesn’t have the capital to survive. At the same time, many startups underestimate their startup expenses, those expenses incurred prior to launch, and their first-year expenses, those ongoing expenses incurred after launch. The bottom line is startups need to have ‘believable’ financial projections grounded in realistic assumptions. As a general rule, it takes the average startup business 7-11 months to reach the steady state ‘break-even point.’ I strongly advise startup clients to ‘stress-test’ their projections by asking, “What happens if the business only achieves 50 percent of projected revenue during the first 3-6 months and expenses are 25 percent greater than projections? ” It’s critical to determine your ‘real’ cash needs before sitting down with a lender to discuss startup financing.
5. Leaving no time to work “on” the business
In his classic book “The E-Myth Revisited,” Michael Gerber points out that everyone who goes into business has to play the role of three people: entrepreneur, manager and technician. The entrepreneur is the visionary, the manager manages staff and establishes processes and systems and the technician is the person who makes the product or delivers the service. Most small business owners are technicians who become business owners because they were really good at their job and decided they would be better off owning their own company. The fatal assumption is that if you understand the technical work of a business, you understand that business. There’s a lot that goes on with a business that a technician cannot intuitively understand without additional knowledge and training. For example, I recently worked with a client who was an excellent diesel mechanic and decided to open his own shop. He quickly realized that if he were only a technician, his capacity to grow the business would be limited because he would be the only one capable of doing the work. However, if he hires staff, he will need to manage them, which now requires a ‘manager’ skill set. My best advice for startups is don’t try to do it alone. Connect with business advisers and mentors, CPA’s, attorneys, insurance agents, marketing and HR professionals who can assist with many of the business functions while you focus on growing the business and those activities that require your unique expertise. At the same time, I encourage clients to read, take classes and attend workshops and webinars to increase their business knowledge and especially their financial acumen. All business owners should have a basic understanding of the financial side of the business.
Resources
The SBA Emerging Leaders program is an excellent seven-month crash course for small business owners of established companies. Recruiting doesn’t start until December and classes start in April but the registration site is open all the time. Learn more at sba.gov/emergingleaders.
