5 Disasters for Your Small Business to Avoid
Whether you’re operating a start-up or an established business, the small-business world can quickly become a minefield. Briefly, let’s review the more common types of business disasters faced by entrepreneurs and small business owners today.
- Neglecting your marketing and letting your new-customer pipeline run dry
If you enjoy the company of entrepreneurs, like I do, you will eventually hear complaints about the feast and famine nature of their business, particularly with solo entrepreneurs in service industries. The feast-and-famine cycle goes like this. Your business starts in a famine state, because you usually don’t have a large revenue stream from day one. You market your services for months and finally acquire a client. Then you work full time serving that client. You are now in a ‘feast’ state. Time passes and the client’s project ends. Wait a minute—you've stopped marketing! You spent all of your time serving your client instead of selling your services. Damn! The famine state returns. Again you market full time to acquire your next client. You eventually land a client, and the feast-and-famine cycle continues.
- Customer concentration risk
Simply put: Don’t put all your eggs in one basket. By definition, if one of your customers represents more than 10 percent of your total revenue, then you have a customer concentration risk in your business. The higher the percentage of revenue that one customer represents, the greater the business continuity risk. You have to face the difficult question: what happens to your business when your largest customer disappears? Will you go out of business? How will you manage that scenario?
- Non-customer-based funding
I worry about start-up businesses that raise equity angel funding or take out a loan too early. You can keep raising equity funding like a start-up dot-com from the 1990s, but equity funding eventually ceases if you don’t make a profit. Alternatively, you can borrow money, but it must be paid back. What, then, is the long-term funding solution? Eventually customers are the only long-term source of funding for any business. Equity and debt should be treated like catalysts and timing solutions, respectively.
- Overly optimistic sales and marketing projections
Most of the business plans that I read contain overly optimistic sales projections based on their sales and marketing efforts. Be conservative with your expectations and you can avoid this disaster. Problems surface when we spend our money before earning our sales. While it’s true that you have to spend money to make money, you do not have to spend most of your money before making any money—or at least establishing a sales trend. Wouldn't you rather under-promise and over-deliver?
- A lack of planning
I’m amazed at the number of people that I come across who are willing to risk their life savings on a small business without a business plan. This disaster is perhaps the easiest to avoid. If you need help getting started or focused on the most important parts of any business plan, try The One-Hour Business Plan, by yours truly. Even a business plan–phobic entrepreneur can spend one hour of writing time. Other planning resources can help as well. These are perhaps the most frequent yet avoidable disasters that I see today. How to avoid them? First, maintain your marketing, even during good times—the feast times. Next, you will need more than ten customers to eliminate customer concentration risk. However, continuing to spread your business across as many customers as possible will keep you open for business. Also, remember to fund your business through customers first. If customers don’t fund the business, eventually the business runs out of money and time. It’s sad, but worth remembering. While we entrepreneurs are an optimistic bunch, creating overly optimistic sales goals and overspending is another avoidable disaster. Finally, plan something before you spend years of time and savings. These are the top avoidable business disasters that I see. How about you? Copyright John J. McAdam 2015. All Rights Reserved.