Most companies have one thing in common—the need to grow. If a business is not growing, it is probably losing share or becoming obsolete. So the question management should always be asking is, “How do we profitably increase revenue?”
To answer this question, management must understand its served market(s), that group of customers whose needs are best satisfied by the company’s products and services.
This is particularly important because besides revenue to cover operating costs, additional revenue is needed to generate sufficient profit to perpetuate the organization. Accordingly, the size and growth rate of the served market determine organic revenue growth.
In the 2015 GOP debates, it was reported that more companies were going out of business than starting businesses. In my capacity as a mentor to small business owners, I am exceedingly aware of the failure rate for companies. Between 80% and 90% of all new businesses fail in the first five years. Why do they fail? I consistently found five primary determinants:
1. Insufficient capital
Companies need enough cash to get past the initial start-up period in the sales-growth curve. This is particularly true for storefront operations, where rent is usually the biggest monthly expense. A restaurant, for example, may have a great menu, an outstanding chef, and a well-trained waitstaff. The locals may love the cuisine. The only thing needed is enough time to get the word out. Unfortunately, there are always unforeseen circumstances, like holidays, construction, extreme weather, and equipment problems. These things can delay sales growth. By the time word-of-mouth starts to bring in more business, companies run out of cash.
You have to have enough cash in reserve to pay the staff, suppliers, utilities, and the rent until the business grows to a self-sustaining level. If you do not have enough money to start and nurture the business, it will cost you dearly. Don’t commit your life’s savings and other people’s money unless you have enough to weather the worst-case scenario. Before you launch your business, you must know where you will get your capital and/or how you will repay the loan.
2. Unrealistic business model
Entrepreneurs can be blinded by their vision for a thriving business enterprise. The best way to avoid this is to crunch the numbers. Make some assumptions about revenue based on the number of customers you hope to serve in a month. What doesthat mean in average sale per customer? Is this realistic? If the traffic and pricing assumptions support the revenue projections, determine your costs—variable, fixed, and period. Subtract costs from revenue. Does the result yield sufficient profit to make a decent living and pay back your investors? If not, adjust planning assumptions until the profit objectives are met.
Now ask yourself, are these planning assumptions realistic for your company? If not, your business model just failed the reality test. It would be foolish to launch a business under these circumstances. Try a few more iterations of modifying the planning assumptions and applying the reality test. Don’t cross the Rubicon unless you are comfortable with the results. It’s better to abandon your dream business than to see it become your worst nightmare.
3. Unrealistic product expectations
A little market research goes a long way to determine the viability of a product idea. There’s a whole school of thought called lean marketing or lean start-up, which emphasizes the need to do market research early and often during product development. Sometimes a pivot is necessary to get the right product to market. Use your market as your laboratory. Talk to prospects, customers, competitors, suppliers, and other stakeholders to get feedback on your product idea. This kind of primary research should make you an expert on the target market, allowing you to tweak the product offering so it ideally serves your market niche.
4. Inept business skills
An entrepreneur must have both creative and business skills to succeed. These must be in balance throughout the life cycle of the business. An entrepreneur that cannot handle a spreadsheet is a red flag. The organization must have the business skills in place to monitor and assess performance against predetermined standards. At the end of the day, it’s the numbers that measure the success or failure of a company.
Most businesses can be ably managed by daily monitoring of three to five metrics—e.g., sales, profits, inventory, purchases, backlog, etc. Owners should either learn the requisite business skills or hire—or partner up with—someone who has them.
5. Lack of commitment
It’s not enough to have a good product idea and sufficient capital to launch your business. Keeping a company on track requires round-the-clock commitment as well as adequate resources. If you are an owner, you must set a work-ethic example for the rest of the organization.