5 Capabilities Small Business Needs To Make It To Their 4th Year.
Here in NSW, Australia, October 1st marks the start of Small Business Month. It is the start of a month of activities and education aimed at improving the lot of small business owners and directors, of celebrating the powerhouse that small and medium businesses are, and ensuring that owners, directors, and all stakeholders of SMEs are equipped with the tools and techniques to help turn those small and mid sized businesses into whatever their owners want them to achieve.
During the coming month, we will be celebrating SMEs too. We’re a SME and startup. First, a few stats – we love stats! Did you know, that SMEs account for at least 80% of all enterprises in most of the world’s advanced economies.
The relative importance of small businesses on the Australian Economy
Small businesses employ about 44% of all employees in Australia
Small business is the powerhouse of a country
Thus, in Australia, in 2014, small business employed over 44% of all employees in the country! The figures are not too dissimilar for the UK, New Zealand, or the USA. We see therefore, that small businesses are the powerhouses, the engine rooms of most modern economies. This relative importance however, is tempered in the knowledge that survival rates for SMEs are lower than for established business, with only around 56% of non employing firms surviving more than 4 their first 4 years. Compare this to 82% of firms employing between 20 and 199 employees. Starting your own business is therefore very risky! What reasons are given for small business failure?
Top 5 Reasons Of Small Business Failure Within 4 Years
1) Lack Of Business Management Skills
It’s great having a wonderful idea, or bringing a service to market that everyone needs, but how will you make this work. Let’s look at a scenario. You are highly skilled widget maker. Your widget saves your customers time, and money. It is a no brainer and your widget is in demand. Business Management skills encompass a multitude of areas, many of which revolve around managing resources; cash, people, supply and procurement or even time and your systems. Knowing how you are utilising these resources, how you will utilise them, and when you will utilise them is critical to small business success.
2) Failing to plan or assess the risk of scenarios
OK, so you know how much cash is in the bank, how many customers will walk through your door, and how many jobs you have booked in over the coming months. You should also know how you reach those customers, and the messages that they respond to. Things are great, life is great, you’re making your business work. But… Australia has often been described as the “Lucky Country”. Indeed, we have been experiencing an unprecedented period of non recessional output for the past almost 30 years. What could possibly go wrong..? If you are in the UK, what will Brexit mean to you, or USA; how will Trump’s trade tariffs affect your business.
Planning for “What If”
It’s all very well knowing what you have now and what you expect to have, but what happens if… the economy falls in each of the next 2 quarters, or interest rates rise, or there is a new shock to the economy, such as was in the 1970s and the oil crisis. How resilient is your small business to such changes, and changes that you can do little about..? Planning for resiliency and certain scenarios is a critical tool any business owner needs. Take this down a level, suppose that your widgets are selling like hot cakes and you are pondering taking on a couple of new members of staff.. What will this mean to you and your business? Can you afford it both now and if things slacken off a little? Scenario planning is a must have, not a luxury
3) Failing to measure and manage
Hand in hand with the above, there is an old saying, if you can’t measure it, you can’t manage it. What are your key measurements in your business? Do you rely on a healthy sales funnel, or direct costs to be at or below a certain level? What are the underlying trends within your business, trends that may not necessarily be apparent within the reports contained within your accounting system? Do you know the overall health of your business and how this is tracking? Managing key aspects of your business is also critical in putting you on the front foot in running your business. Having an visible, early warning of a potential problem could mean the difference between success or failure.
4) Adequate cash flow management
“Cash is king and far more important than profitability in small businesses”. In some respects. This is true, but do not let this deceive you. Banks, financial institutions prefer both businesses and individuals to be aware of their likely cash needs and their ability to generate it. It’s as simple as that. If you are a seasonal business, that’s quite easy to show your financiers the ups and downs of cash within your business. However, when experiencing growth for example, what effect will the investment in a new widget machine or new staff have on your cashflows..? Whilst planning for cash is never an exact science, it must be done diligently, and realistically. You should understand the probabilities of a tranche of cash being generated or expended and how this will; affect your operations.
How good are you at collecting your client invoices..? would an improvement in collections of say only 10% mean that you do not need additional and often expensive financing arrangements..? One case study we recently reviewed, showed that by employing two part time Accounts Receivables officers, the accounts receivables period (the amount of days taken to collect client debts) could be reduced by around 50%, which actually increased cash in the bank at the period end, even after the additional wages costs. Managing and planning cash is vital in the survivability of your business.
5) Marketing – understanding the market and communicating your message effectively
Marketing is not sales. It is about knowing your customers, who, where they are. How to communicate with them most efficiently, and understanding what they are needing from your product or service both now as well as in the future. Marketing is about maximising your communications efficiency to your client base and minimising the cost of providing your service or good to the most clients. It is about understanding needs, wants, triggers and how you win a new customer and what combination of product, price, promotion, place etc will give you this outcome.
Bringing it All Together
Small businesses power many of the world’s economies but also experience high failure rates and turnover. We believe that these 5 skills and capabilities will minimise the potential of your business to become one of the latter statistics. Jazoodle was developed as a means of giving small business owners 4 of these 5 capabilities, and to give them simply and quickly. We have seen enough small business owners struggle financially, mentally, and physically . Adding these capabilities will help small business owners become more successful, and therefore ensure that the stresses and demands of running a small business do not become an over burden. The economy needs entrepreneurs to be successful .. and so do your families…
There are many resources out there to help businesses succeed, both commercial as well as Government funded or promoted. For example, Jazoodle Biz Professional is a web based financial performance, valuation and scenario planning platform that enables business owners quickly, simply, and powerfully in helping them run and plan for their business success.