Growing up in a marketing agency working for clients, I added exactly how a business makes money to my knowledge base. I leaned in to really learn how to sell something for above market value, to comprehend product or service gross margin, what business expenses you easily see and those which are hidden, and the most important thing of all, to really understand and manage cash flow. It’s one thing to want to start a company based on an idea (not so good) or a problem (better). But do your due diligence by first learning the business financials and metrics by studying other similar businesses or your business might fail for all the wrong reasons.
If you are thinking of starting a small business, make sure you follow these important principles for small businesses.
Manage your cash flow. The number one reason small businesses fail is a lack of cash, not a lack of profits. You need to do good cash planning, and really understand the decisions and expenses in your business that can affect your cash. You could launch the company and be so successful, you might not have enough cash on hand to order additional inventory or to provide the services necessary to support your customers.
Identify key business metrics. Tracking key performance indicators (KPI’s) for your business, and understanding why they go up or down, can help you make decisions that will grow your business and keep you on track. Rely at a minimum on the power of five: revenue, gross margin, cash flow, accounts receivable (money owed to you), accounts payable (money you owe). Figure out a way or a tool to use to track this weekly. That way, you will avoid being surprised.
Lean everything. 60 percent of the small businesses that fail in the USA fail due to lack of cash, not lack of profits. Using a lean mentality, think more creatively of how to avoid paying for anything that is not absolutely necessary. How many times have you heard of a story of a successful business that was started in a garage, in an apartment, at a friend’s business and so on? The reason you heard it is because its true. Keeps your costs and resources as lean as possible in the early days. Doing so will free up cash flow.
Understand your gross margin. You do not have to be an accountant or a finance major to understand gross margin. If you sell something for $100 dollars and your direct costs are $40 dollars, your gross margin is the difference which in this case is $60 dollars. Then you add in all your indirect costs, which might be rent, labor, taxes, etc. to get to your net profit. So before you even start your business, understand the marketplace, trends and your target customers to see if they would be willing to pay for something that will give your business a good gross margin. Without the cash flow from a good gross margin, it may be impossible to run the business.
Culture and mission equals talent. Understand, on purpose, exactly what kind of values you will manage your business by and the culture you will try and build within the business. That will help you recruit people who believe in the same values and will contribute to the core culture. People like to work for businesses that are more than just a machine for making money. That doesn’t mean that you can’t have sales goals, and profit goals; it just means that your employees will work harder and be more loyal if they feel like they are contributing to a greater mission. Don’t hire anyone, regardless of talent who does not believe in the value, culture and mission of the company.
Talk to your customers. This sounds so simple. But once you launch a business, unless you have face-to-face interaction with your customers, you lose sight of this important aspect of your business. You tend to focus on “shipping products” versus satisfying customers. Utilize simple survey techniques to continually gather customer feedback. Look for opportunities to talk to real customers at tradeshows, events, conferences, etc.
Marketing has to equal sales. Marketing is not some cool thing you do to see your business in some ad or promotion. It needs to drive sales. And in the early days of the business, when you don’t have much cash flow, you will need to rely on free and organic ways to drive your marketing with blog posts, social media, videos, word of mouth, etc. When you do talk to customers, ask them how they heard about your business. When you can afford to do marketing, figure out how to track the marketing tactic back to sales.
Know your competitors. You need to know and understand both your direct and indirect competitors. You always need to keep an eye on your competitors, understand what they are doing, how they market, what their pricing is, etc. Set up free Google Alerts on each of your competitors. That way Google will send you an email each week on anything your completion has published online or when they appeared in an article. You may be unique in your town, or in your industry and not have direct competitors but that doesn’t mean you don’t have indirect competitors. Costco is your friendly warehouse store partner until they Kirkland you.
Telling your friends and family that you are starting a business is the easy part. Building a business is much harder but rewarding. If you are going to try and create a successful business, know what you need to focus on and understand the key principles of the business that will help you hedge your bets to actually surviving, and hopefully, one day thriving.
By Bernhard Schroeder