Is Lack of Capital #1 Cause of Business Failure?

Small Business Growth Myth #1: Lack of capital is the #1 cause of small business failure. Actually, lack of capital is a symptom of deeper business problems.

What things do people believe about small businesses that just aren’t true?

Small Business Growth Myth #1: Lack of capital is the #1 cause of small business failure.

In my experience, lack of capital is a symptom of other problems in the business. This myth is like saying that heart attacks are a leading cause of death, but forgetting that most heart attacks occur to 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.

 

What’s a Typical Growth Rate?

How fast should I grow my business? Here are several factors.

From a question asked at my plan workshop

MC. “What’s a typical rate of growth?”

MVH. There’s no typical rate.  It is better to ask what growth rate could you handle? Also, what is the right size for you to grow to? How big do you want to grow and why?
Your rate of growth will depend on several factors:
• How you finance–self, bank, investors
• How scalable your business concept is
• Quality of your top people. Your growth team
• Your systems. Can your systems be easily scaled up?
• Ease of bringing in new customers
• Your ability to manage growth or to hire managers who can do so for you
• Outside variables. Economic climate. Amount of competition. Laws and regulations that impact you.

I would be glad to help you assess these things for yourself. This is an issue we work with all the time in our Business Groups.

Getting Paid for Work for Canadian Client

How do I bill for my graphic design work for clients outside the U.S.—especially in Canada? LinkedIn question by Priscilla Pike, graphic designer

Specify in your contract:
— You get paid in US dollars
— Disputes will be handled in your jurisdiction

Who owns the work you do? Check the laws in other countries about “work for hire.”

Get paid via your merchant account. Don’t have one? Set it up. It makes out of country receivables so much easier for you. I’m not sure about PayPal outside US.

How Do You Set Prices for Your Products and Services?

Question from Alicia Terry on Linked In. She also asked, “What is your biggest challenge in setting your price?”

Set prices using two different methods:

A. What the market will let you charge, e.g., competitors

B. What costs you must cover, plus a profit margin

If A > B, charge A

If B > A, then go back to the drawing board. Perhaps you can redesign your product or service so that you can sell it profitably at the price point the market will allow.

Or perhaps you need to promote it in a way that will justify the higher price in the eyes of your target customers.

Many entrepreneurs fail to include all relevant costs when setting prices. Items often neglected: Markup on direct labor, sales commissions, freight costs, damaged goods, warranty work, project management. And #1: the value of the time put in on the job by the owner!

Small business owners underprice. They’re notorious for this. “I’m new, so I’ll offer more for a lower price.” You can’t compete this way with larger, better-capitalized competitors. It’s the route to bankruptcy.

In many fields, if you price too low, people don’t take you seriously. “Is that all he’s charging? He can’t be much good!” Charge at least what your larger competitors are charging, and demonstrate to customers why you are worth it, since you are better.

For small service businesses, look for clients who know the value of their time. If you can save them time, they are willing to pay more for that. Turnkey, troublefree, flexible, responsive–these are the things I will pay extra for. And of course friendly, personal service.