Many years ago, I read an article in the Wall Street Journal that had such a powerful message that I have repeated it in nearly every lecture and workshop I have ever delivered to fledging entrepreneurs. The article listed, in order of importance, five significant things every small business needs to be successful. The first three things on that list, access to capital, business acumen, and energy, are extremely important for every business owner to have in place to survive and thrive as a business. The remaining two, industry knowledge and a good idea, are things that are important for some businesses and less important and sometimes even a hindrance for others. Let’s explore the top three things that your business needs if you hope to be successful.
Access to Capital
If you are successful, you will need more money and if you are not successful you will need more money.
The number one reason that most businesses fail is the lack of access to capital. I’ve heard it said that 85% of businesses that fail, failed because of cash flow issues. They simply run out of money before they reach breakeven and achieve profitability.
When I was just starting as a small business mentor many years ago, I used to have a co-mentor who once told me, “Steve if your client has a successful business, they will probably need more money to grow.†Then he added, “Steve if your client has an unsuccessful business, they will probably need more money.†It made as much sense then as it does today and reinforced the data from that wall street article stating that access to capital was the number one thing every business needs to be successful.
I personally learned the value of access to capital when I ran a documentation and training business. We were doing about $2.5 million per year in revenue when we won a rather substantial long-term contract from a telco company that increased our sales by about 30%. As you might imagine on the day we won that contract, we were elated. That elation soon faded because we failed to secure enough access to capital and it almost crushed our business a few months later.
The contract necessitated that we hire ten new employees and purchase new computers and desks so our new employees would have a place to work. Since our current office space was almost at full capacity, we had to lease some additional office space. Being in a service industry, we would work for about 30 days and then bill our customers monthly thereafter. Our invoices then took another 30 to 45 days to run through our clients’ accounts payable systems before we would finally receive a check.
At the time we won the contract, we had about $150,000 in working capital. Since we were billing this client close to $100,000 a month and being in a 7% margin business, our monthly related expenses for this project alone amounted to roughly $93,000. As a result, we soon depleted all our working capital while we waited to receive payment on our first invoice. With still perhaps 15 to 30 more days before we anticipated getting paid, we did not have enough cash to cover payroll, rent, and monthly payments on the new equipment. As officers and investors, we had no option but to stop paying ourselves. Moreover, we had to resort to heroic financial measures just to keep our doors open until we received a check from the customer each month.
Therefore, the reason that access to capital is the number one thing all small businesses need to survive is, that unless you can execute your business plan exactly as you drafted it, you will likely need more money, either to meet greater than expected growth or if your ramp toward breakeven is slower than expected, to feed the beast until you get there. At some point, every business needs access to capital and it is best to line it up before you need it.
Business Acumen
Most businesses are started by someone with technical skills. Â As a business owner, understanding finance, marketing, and operations is more important than technical skills.
Many business owners are what Michael Gerber in his book The E-Myth called technicians. These owners understand the technical parts of their business, but few truly understand what it takes to start and operate a business. Having mentored thousands of fledgling entrepreneurs, few can accurately define what an income statement is and why it is different from a cash flow statement, or the difference between sales and marketing. Many business owners figure they can just wing the business acumen part. However, many founders soon learn they are in way over their heads. Some will admit their ignorance and seek advice from a business mentor, but many others will simply flounder until their business finally fails.
My first foray into the business world was with Invisible Fencing. My distributor was a great mentor and taught me many lessons about sales and marketing. Moreover, being a franchise, it was basically a business in a box. As long as I followed the examples and directions from corporate, my chances of success were far greater than if it were a startup.
After I lost that business because the margins were not high enough at the time to go all-in, I became a cost center and site manager for Digital Equipment Corporation (DEC), a computer company. As a result, I learned the financial side of business operations.
I was lucky in that I learned about marketing and sales from my Invisible Fencing experience and accounting and finance from DEC. However, few founders have the prerequisite business acumen when they start their business without gaining some experience on the job.
Every business needs a leader with business acumen. Organizations such as SCORE and the Small Business Development Center exist to provide founders and business leaders with a way to develop their business acumen.
Energy
Business ownership requires a significant time commitment to get it off the ground and to maintain its operation. Â If the entrepreneur lacks the energy and commitment to do what it takes to keep the enterprise moving forward, the business will fail.
Being a business owner is not a 9 to 5 job. Successful business owners can’t just turn it off at the end of the day.
I have a few elderly clients that have spent a career honing their technical skills and want to start a business in their twilight years to leverage their knowledge and leave a legacy. However, most have reached a point in their lives where they also want to enjoy the fruit of their labor over a lifetime of work and are not willing to put in the work necessary to make their business a success.
Personally, I work every day. I spend Monday through Wednesday on operational issues such as working on improving my websites, marketing, taxes, and attending meetings and workshops. Thursdays, I mentor small business clients all day. Fridays are my catch-up days for personal and business issues and Saturdays and Sundays are my blog writing days because I can work with limited interruptions. Every morning, I begin my day by spending about two hours reading business-related articles to keep abreast of new trends. When I go on vacation, I bring either an iPad or laptop with me so I can work on the road. When I’m driving my car, truck, or motorcycle, I’m always listening to a business-related audiobook, trying to find that next golden nugget of information that might transform my business.
Being a business owner means that you are constantly dealing with issues or trying to learn something new to improve your business. I even dream business-related dreams and keep a recorder or notepad by the bed to record ideas that come to me in the middle of the night.
Every business needs a leader with lots of energy and passion because being a business owner is a 24/7 job.
How do you plan to ensure that your business needs for access to capital, business acumen, and energy are met?
