Most Businesses Fail Due to Poor Decision-Making. Here’s How to Prevent It
10 Tips for Small-Business Success
By Douglas McColloch
So-called “open-to-buy” inventory controls are an essential element of a successful small business. Having the proper controls in place can help you anticipate periods of peak and slack sales while maintaining a positive cash flow. Shutterstock.com
According to the U.S. Bureau of Labor Statistics, 20% of small businesses go bankrupt within one year, and more than 50% fail within five. The reasons may vary between businesses (bad cash-flow management, poor product quality, lackluster customer service), but they can generally be traced to a single source: poor decision-making.
A recent SEMA Education webinar, “Small Businesses Don’t Die—They Just Make Too Many Mistakes,” explored the many pitfalls that can await the unprepared small-business owner, with expert advice on preventing bad decisions before they happen. Moderated by Tom Shay, a fourth-generation small-business owner and author of more than a dozen books, the webinar covered a variety of topics that included finance, marketing, customer service and employee relations.
Shay opened the discussion with a personal recollection of running into a long-lost business acquaintance at a coffee shop. The acquaintance, who’d been the owner of his own company, was now reduced to working as a “consultant” for the same company after having lost everything to bankruptcy and selling off the business.
The encounter got Shay thinking of how small businesses fail. Over the course of his ensuing research, Shay discovered some common injuries that befall failed businesses, and practically all of them are self-inflicted.
“Every business I’ve seen that has failed has been a very willing participant in that failure,” he said.
To avoid falling into the failure trap, Shay advised business owners to keep some commonsense principles in mind when formulating their business plans.
Cash on hand and profit are 100% unrelated. Assuming the role of an imaginary business owner, Shay said, “As long as I have enough products on hand and work to do, I expect to have enough cash on hand in the business.” But then he added, “If only that were true.” To Shay, improper cash-flow management is the leading reason for small-business failures.
“Of all the businesses in the United States that fail, the last financial statements they issued before they failed said they were making money,” he said. “Over half of them were actually profitable, and yet they folded. What happened? There wasn’t enough cash in the checking account.”
Would-be small-business owners are well advised, therefore, to have enough cash on hand to keep the company going for at least 12 to 18 months to ensure viability during lean times.
Inventory control is a necessary process. Many business owners don’t believe that they need some sort of inventory control or “open to buy” system. But Shay advised business owners to ask themselves some basic questions: “Here’s what I need. Here’s when I expect to sell it. How many do I have to buy at a time? Is there a deal if I buy more? What about freight? If I buy a certain quantity, do I get freight for free? And in today’s economic environment, do I need to look at buying lots of it, or buying whatever I can? These things all need to come into consideration.”
A written long-term business plan that includes a company mission statement and detailed job descriptions for every employee should be considered mandatory for any business, no matter its size. Shutterstock.com
By having an inventory control program in place, business owners should be able to calculate open-to-buy for any given product category for the foreseeable future. This is especially important when one considers the following:
“Everything we do in business has a seasonality to it,” Shay reminded. “There will come a time when you’re going to go down to the show floor, see something you think is awesome and that you know you can sell—and six months from now, you haven’t sold the first one because you guessed wrong.
“It’s a balancing act. Unless you have unlimited floor space and unlimited dollars, you have to learn how to balance things. But it’s not so simple as ‘I sold five, so let’s buy five more.’”
Which leads to the next point:
You need a written business plan. Shay cautioned against taking a “get out of bed, go to work” approach. “As a business owner, you need a vision,” he said. He urged business owners to ask themselves, “Where is this business going to be in five or 10 years? How many service bays do I expect to have? How many employees? What’s the dollar volume I expect to hit?” These are all questions that a comprehensive business plan can help to answer.
But in addition, you need to add a written mission: “Why are we here?” Put it in writing, Shay said, and “everyone who works for us will understand what we’re here for.” Besides clarifying the purpose of the business to current employees, this can also help employers make better decisions when interviewing prospective new hires: “Does this person fit that vision?” If you have doubts, Shay advised, it’s best to look elsewhere.
Enjoy your work, but don’t overlook its end purpose. It’s liberating to have your own business, but don’t sell yourself short simply because you have autonomy. “Never ‘settle’ for something,” Shay said. “Doing what you love at work can be fun, but it’s also fun to look at the monthly financial statement and say to yourself, “That’s mine?’
“There are lots of people who start their own businesses because they love what they do, but love is not a business plan. You’ve got to love making money as well.”
Stake out a unique brand identity, but be willing to modify it. “No one can be everything to everybody,” Shay said, stressing the importance for business owners to offer specialty products or services that customers can’t readily find elsewhere. “I don’t see how anyone can specialize in all vehicles,” he said. “The old adage is, ‘The better you ‘niche,’ the more you get rich.’”
On the other hand, if customers continue asking for goods and services you don’t have, “perhaps it’s time to look at the business plan and think about adding on.” In the final analysis, “Your customers will tell you what your business should be.”
“Show, don’t tell,” your customer service. Advertising is important to the success of any business, but its measurable impact is what matters most. Instead of relying on traditional advertising models to announce promotions or sales, Shay suggested a different, more direct approach: “What if you took the money you spent on radio and had someone call every one of your customers to tell them about what’s coming up?
“If I’m a customer, you can talk about customer service all you want, but show me instead. And if you’re a business owner, what’s going to pull better for you—a paid radio ad or your customers telling other people they know about how well you took care of them?” In Shay’s opinion, advertising isn’t important—effective advertising is.
Is your management style too hands-off? You may need to tighten things up. “If I’m going to steal from you, thanks for being so consistent,” Shay quipped about employees who take unfair advantage of same-old, same-old work routines and less-than-rigorous sales floor management to engage in workplace theft.
“In your business, are you that predictable?” he asked. “What can you do to tighten the way your business runs?”
You need clearly defined job descriptions, policies and procedures. Even if you have a hardworking, loyal workforce, don’t assume that your employees inherently “know” what their individual job responsibilities are or understand your company’s work policies. “You want policies and procedures in place so there’s a consistency in the customer experience when they do business with you,” Shay explained.
Additionally, having defined policies and workplace procedures assumes even greater importance in an automotive-related industry that may involve operating heavy equipment or handling materials that contain known carcinogens. Failure to have such policies in place can potentially result in personal-injury claims, lawsuits and OSHA visits.
Don’t over-rely on technology. “Technology can be the death of a small business,” Shay warned, emphasizing the value of the “personal touch” in human transactions. “In the automotive service business, the biggest step in technology we have taken has gone from a sticker that we put on the door telling you when to change the oil to this new fancy technology we called ‘static cling’—and that’s where it stopped,” Shay said, adding that, “Even your dentist will call you back six months later to remind you of your next appointment.”
About Tom Shay
A fourth-generation business owner, Tom Shay has been writing about small-business issues for more than 30 years. He is the author of 13 books and has been published in dozens of industry trade publications. His company, Profits Plus Solutions, advises small businesses on management, staffing, business strategy and financial planning. He can be reached online through his website, www.profitsplus.org.