Do Small Businesses Fail for Lack of Money?

April 12, 2012 · 8 comments

in Growth Management,Finances,Thrive in tough times

I say it’s a myth.

cash management, cash flowBelieving this shifts attention away from the real problems. It’s like saying the leading cause of death is your heart stopping. Well, duh. But why did your heart stop? Most heart attacks hit people who haven’t been taking care of themselves for years.

Same with business. Running out of money is often the endpoint of years of bad decisions. For example:

Not watching the numbers closely. Not having financial statements you can understand, and not getting or reviewing statements in time. You should tell your bookkeeper/accountant exactly what numbers you need to track, when, and how you want them displayed. If they don’t give you what you want, replace them.

Not controlling costs. Keeping unnecessary payroll and other expenses. Some owners borrow money to avoid laying people off. During tough times, if you’re not ruthless with expenditures, you won’t have the reserves to take advantage of later opportunities.

Focusing on revenue instead of profitability, therefore not paying attention to the margin of jobs or sales. Taking any work. “I’ll make it up on volume.” “Maybe they’ll grow to be a big customer.” Don’t bet your business on these beliefs. Insist that every job must make a profit. Make sure you have systems that allow you to allocate costs to profit centers, so you can know the profitability of each thing you sell.

Under-pricing. Many small businesses try to meet the prices of large, well-capitalized competitors, rather than competing on unique services and features that set them apart and command higher prices. Set your prices to include your desired profit margin.

Not anticipating needed growth capital, so that a growth spurt causes a cash flow squeeze. It’s very difficult to grow relying on current cash flow. People criticize companies like Apple for amassing a huge cash hoard, without realizing that this is necessary to fund growth, innovation, and keeping options open.

Having the wrong kind of financing. Financing growth with a short-term line of credit that must be paid off each year, rather than with a 5- to 7-year term loan. And how many of us have financed growth on our credit card, thus saddling ourselves with interest payments that eat up the profit needed to repay the loan?

Not saving during good times, so that you have a fund for tough times. Too many owners would rather spend than save because they don’t want to pay taxes on the profits.

Not being “bankable.” For example, if you run your business to minimize taxable income, you’ll never get a bank loan. Try telling your banker that you really do have a profitable business, despite what your tax returns show. Take your banker to lunch, and ask what the bank will need from you in order to approve the loan you will need.

Not refining your business model to stay competitive and to meet the emerging needs of your customers. Just staying the same because it’s the easy thing to do. The old cliché, “Work on your business, not just in your business,” means that you as owner need to keep looking at opportunities, challenges, alliances, and strategies.

Ineffective marketing. If you don’t keep looking at what works, refining your offering and outreach, and dumping the rest, your business will slowly decline. Where can you get the most bang for your marketing buck? What ineffective things should you drop? How can you leverage your effort?

I’m sure you can think of others. If you address these problems in your business, you’ll never have to use “I ran out of money” as an excuse.

This is one of the lessons in How to Thrive in Tough Times—Lessons From Small Business Owners–my newest ebook, just posted on Amazon for Kindle, iPad, etc. for $2.99.

 

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{ 8 comments… read them below or add one }

Dan Phillips April 21, 2012 at 10:07 am

SOME GREAT ADVICE BUT MISSING SOME KEY POINT S. LESS THAN 10% OF ALL BANKS ARE EVEN LENDING MONEY TO SMALL BUSINESS ANYMORE.
EVEN THOSE WANT CASH AS COLLATERAL AND THE LARGER COMPANIES ARE KILLING NICHES EVERYDAY.
VISIT MY WEBSITE ABOVE TO READ WHAT IS REALLY GOING ON NOW. ITS A WHOLE NEW GAME WITH YOUR GOOD ADVICE.

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mvh April 29, 2012 at 7:37 pm

Agreed, Dan, the difficulty of getting bank financing is a major problem for many small businesses. But biz owners need to clean up their own houses first, and see how they can become more bankable. Then, you may be able to get needed growth financing outside a bank. Of the companies I am currently working with which are seeking growth capital, about half are getting bank financing, but the other half are getting financing from customers, strategic partners, and private investors. The world is awash in money. You’ve got to find the person or entity who can benefit financially from your growth, profitability, and success.

Jennifer Rai April 29, 2012 at 6:52 pm

I agree with all the points mentioned above, especially the importance of refining your business model. It is essential to keep up with the competition today, and follow new business trends. Also, taking advantage of social media marketing in addition to traditional marketing will keep your business in the limelight and well ahead of its competitors.

Thank you for sharing.

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mvh April 30, 2012 at 7:45 am

Thanks, Jennifer. Good example. What amazes me is someone who thinks, “Times are tough, we have to cut back. Let’s cut marketing expenditures.”

Dan Phillips April 30, 2012 at 5:39 am

Those methods do work but they are after you are established. New start up small businesses have been in the past responsible for 85% for all new jobs created and the resources you mentioned are almost non- existent when it comes to loaning money to this group.
So at the end of the day you scenario is very likely protecting jobs which is good thing but not moving the economy forward.

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mvh April 30, 2012 at 7:37 am

Dan, True, my comments target established operations.
It has always been tough for startups to get bank financing. So “mom and pop” businesses rely on savings, family, and friends. Some are financed in part by vendors or even by their customers. Companies with rapid growth potential may get angel financing.
What about crowd funding? New legislation legitimizes it, but several websites have been organizing it for awhile. Have you seen any positive impact on startup funding?

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Dan Phillips April 30, 2012 at 8:02 am

Mike,
The issue right now is that everyone is squatting on the funds in general. I wrote a book called “The Last Will and Testament of Small Business” to point out what is going on currently and what needs to be done to clear the obstacles so the small businesses can pull the economy out of the hole again.
When there are 6 million companies under 500 employees and 37000 over 500 employees you can begin to see where the opportunities lie.
The available capital is out there but when very few are lending and then the walls are being built as we speak you and I need to need to keep trying to help break open the defensive line to allow the small businesses the chance to correct this. I think the real problem is that few see the real issues clearly.

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mvh April 30, 2012 at 9:32 am

I agree with you, Dan. It’s really a political issue, since the money is there. There just aren’t enough people in government who understand the realities of small business, even though they talk a good game. Neither Democrats nor Republicans.
Your thrust is working to change things from the political side. Essential!
Mine is to help small businesses make the best of the situation we’re in by preaching two messages:
— Since bank financing is so hard to get, look at all the alternative sources
— Don’t blame banks for your own operating deficiencies. Clean up your own operations in the ways I describe so you use your cash flow better.

So you and I are complementary.

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