The temptation to start a small business or venture into self employment can be strong particularly for those who are unhappy with their existing employment situation. The freedom and flexibility that being your own boss seems to offer can be seductive, as is the potential for growth which you, as the business owner, can have full control over. You may have an idea or a particular skill that you believe is desirable to a specific target market and you are confident that once this target market is aware of your existence they will all be banging down your door. Consequently, you start your business by offering an amazing product or services, only to realize that building up a customer base is more challenging than you thought. Additionally, there are a number of other obstacles for which you do not have the expertise (done by another department when you were an employee) whether it is marketing, website development, legal research and accounting. Finally, you realize that you actually need a fairly sizable source of cash to maintain the business, deal with growth opportunities, whilst ensuring that you are able to support yourself.
The chart below, published by Statistics Canada available Key Business Statistics – July 2012 (this seems to be the latest data that is available), demonstrates the percentage of small and medium sized enterprises (SMEs) that actually survive over a five year period.
This table demonstrates that only 50% of SMEs continue to remain in business 5 years after inception. In 2011, 3,600 bankruptcies were declared which is actually a fairly major improvement over prior decades. Keep in mind, however, that only a small proportion of businesses that cease to operate actually end up declaring bankruptcy.
The following table shows the number of entries/exit of businesses:
It can be noted from this table that more businesses ceased to operate in 2008 than were created, although on average the entries still outweigh the exits.
So, what can you do to improve the chances that your business not only survives, but thrives?
Have a Marketing Plan: Clearly you want people to know about your business. While word of mouth is going to be a huge source, particularly in the beginning you will also want to map out different ways of getting the word out there. Take advantage of free resources like Facebook, Twitter and Pinterest. Have a website that looks professional and enticing. Start a blog to showcase your expertise. Participate in tradeshows and charity events. And take your business card with you everywhere as you never know when the opportunity to market yourself might arise (while also not ramming your business down people’s throats)
Know your Competition: It is essential to do as much research as possible (Google is a wonderful resource) on other businesses who might be selling the same or similar products or services. What makes you different, superior? As a side note, it is generally best not to compete on price alone as this tends to be a short lived advantage.
Track your Expenses and Revenues in Excruciating Detail: Building a weekly or monthly cash flow is not difficult and is absolutely essential unless you have unlimited resources (in which case you can probably skip this step entirely). Consult with a business advisor or spouse or friend and brainstorm through all your potential expenses and their specific timing eg. you might only need to order cucumbers for your pickle making business after you have received some orders. At this point it might also be useful to consult an accountant to help you build a cash flow statement that is specific to your needs.
Keep Business and Personal Finances Separate: While a small step, it is important to maintain the separation of personal and business expenses to give you a good sense of where you stand just by glancing at your balances.
Have a Tracking/Accounting System: Categorizing your revenues and expenses and keeping track of accounts receivable, payable, inventory etc. can all be accomplished with a good accounting software. While they may seem intimidating at first, often they are fairly simple to use and can be an invaluable tool in understanding the finances of your business.
Have a Nest Egg: No matter how exciting or marketable your business idea, it is extremely important to have a savings account which you can draw during the first few months when you are not generating any, or enough, revenues. Your cash flow, which you will have prepared per above, will guide you on how much you need to have on hand for the business. Additionally you should list all your personal expenses to determine exactly what your total cash flow needs will be over a year’s time to avoid starvation and homelessness (or having to move back in with your parents)
Understand any Regulatory Obstacles: Before execution of your business idea, it is important to research any regulatory or corporate obstacles that might exist that might impede your business. There are few things worse than getting a cease and desist order particularly when your business is in full swing.
Know your Partners: Going into a partnership with someone should be undertaken very carefully. You may love someone as a friend or family member, but business and financial problems have been known to break up the strongest of relationships.
Be Prepared to Work Hard: As cushy as owning your own business looks from the outside, where you can make your own hours, work in the comfort of your own home (and pajamas) and not have to waste time reporting to any one, it is actually much harder work than being employed by someone else. You are now responsible for your own financial well being and the success of your business venture. You still have to report to clients and probably have to be much nicer to them than you were to your boss and co-workers.
While the survival of any small business depends on a combination of factors, not all of which are within your control, it is important to be as prepared as possible, be adaptable to changing conditions, turn obstacles into opportunities and most importantly perhaps, have a sense of humour when things seem to not be going your way.