Here are the five major causes of business failure and some tips on how to reduce your exposure to these risks.
1. Client Over-Dependence: Take a good hard look at your receivables spreadsheet. Does half or more of your monthly revenue flow from just one customer? If the answer to this analysis is yes, then I’m sorry. You are less a business enterprise and more of an independent contractor. The risk to your future and that of your employees is obvious. The action you need to take to counter this risk is easier said than done: You must diversify your customer base.
Even if your top client pays well and on time — what a godsend that can be — and is as reliable as the day is long, you cannot afford to be complacent. Expanding your client base has to be your top priority. See my previous newsletters on Sales Skills to help you craft the right approach.
Even though you have employees of your own, with a mono-client structure you are a subcontractor for that greater business. Your excellent client is outsourcing its payroll to you. All of the attendant risk is transferred from it to you and your people, of course. Everything is fine and dandy as long as your principal customer has a long-term consistent need for your goods and or services, and the “wherewithal” to pay.
BUT! It is ALWAYS better for your enterprise to spread its sales eggs among a number of baskets, so that the many can pick up the slack when any of the few stop paying.
2. Cash Drought: Cash is king in business, but it does not grow on trees. It is as true for you as it is for your business. We all need sufficient liquidity, aka “cash in hand,” to cover all of the short-term payables of home and business. When the capital begins to drain away in either arena, entrepreneurs must either be well capitalized or have a source of cashflow to draw on when required.
Many of our clients here at PBC are small businesses where the founders are in paid employment at the same time as they build a business. This dual focus makes it hard to grow your business, but a dried-up cash flow means business growth is impossible.
Cash flow management is relatively simple when there is only you. But it becomes exponentially more complex with each new customer and every act of recruitment. Professional help from a CPA is always a good idea. Support on the bookkeeping front can prevent it from becoming a reason not to expand.
3. Running Out Of Personal Energy: The long days, the seemingly endless demands, and the constant pressure to perform can sap the energy of even the most committed entrepreneurs. As the founder and main business owner, you will often be doing the most hours of all your people.
The greater the fear that your business will stall without your presence, the more you are tempted to procrastinate on taking rest and recreation, away from work responsibilities. There are two things to do to keep your business on a sustainable path and avoid the mistakes that flow from fatigue:
A. Discover the activity rate that keeps your business cruising and growing without draining your personal energy reserves. This risk is with you from day one and is a constant challenge on the growth path of every small business.
B. Be aware that rest and recreation are as crucial to your business success as cash reserves. One of Stephen Covey’s “7 Habits of Highly Effective People” habits is “sharpen the saw.” It is essential to balance your personal production with your capacity for further production.
4. Founder Dependence: Imagine your business is a car. Are you the starter motor? If it does not go without your presence, then it is a business on a knife edge. Too many small businesses are at risk from this, yet it is the easiest risk to mitigate. You just have to empower your employees or partners.
With mindful coaching and training, this does not have to involve a loss of quality or performance. Fear of just this is often the mental stumbling block for entrepreneurs.
But delegation is a skill that can be perfected.
5. Getting Too Big for Your Boots?: Even with the best of delegators at the helm, a business will reach a point in time when it must sacrifice something for further scale. It may mean not personally being in touch with every client relationship or not pre-delivery inspecting every nut and bolt.
Your commitment, personal engagement, and that attention to detail are what takes a business to early success. You have the roots to grow, but do you have the wings to fly? When there comes the tipping point at which the issues from growth seem to match or even outweigh the benefits, do you have to sacrifice quality for scale?
The wings to fly sprout from your ability to guide the company’s processes towards systematization, standardization, and automation to achieve scale without hurting your brand. Check out “Thriving in a Matrix World” and the IMPROVEment cycle.
The five big business risks do not have to be death knells for your business. Forewarned of the challenges ahead means forearmed.