Stumbling blocks small businesses face, and how to get around them!
Throughout the United States, thousands of entrepreneurs launch new businesses every day. Unfortunately, the majority of them also close their doors within two years. It’s easy to think of an idea, but much more difficult to build a business, to make it succeed, to avoid the traps, stumbling blocks and frustrations of owning your own business.
Bill Palladino, a certified small business consultant with the Michigan Small Business and Technology Development Center (MISBTDC), and Wendy Wieland, a certified counselor with the Northern Lakes Economic Alliance, revealed just a few of the stumbling blocks start-up and existing businesses might face.
The biggest obstacle that comes up is not having enough capital to push through the first two years. People often assume that if they can afford the down payment or they pay for the initial inventory, that will be enough.
“Finance is the biggest most determining factor of long range business success,” Wieland said. “If there is one thing that will close your doors fast, it is not being adequately funded,”
Having enough capital is especially important up here in northern Michigan.
“We have some unique challenges to the businesses’ economic point of view here. We’re seasonal, no matter how we dress it up,” Palladino pointed out. “We have a great 75 to 90 days in the summer, where you can make your money, and then we have a regeneration sometime around Christmas. Typically, people don’t understand the seasonality and that financing comes into play when you approach March or April that first year and tax season hits…you have 25 percent of the sales you thought you were going to have the last three months and you have three more months before tourism is back in town. You really should have enough capital to get through the first year and probably the next year, as you stabilize your business.”
At the MISBTDC, consultants put the financial statements down on paper so the owner can see what their financial situation might look like. They can see over the course of two years where the dips and the peaks will be regarding cash flow. Many owners who walk in the door have the cash flow already done with the same amount of income for each of the twelve months. But there are months where bills may be higher, unforeseen contingencies happen and certain months where they will make less income.
Not enough financial savvy.
Some entrepreneurs have no understanding of how finances really determine the success of a business, what a cash flow statement is and what a balance sheet is?how all of those things relate to the success of the business.
“If you want to expand and go to a bank for a loan,” Palladino explained, “the bank will want to see good cash flow for three or four years and a real balance sheet for the last two years.”
MISBTDC suggests strongly businesses they counsel get an accountant to work with them, perhaps even an attorney. At least have an accountant set up the books for the business.
“You need the financial savvy for all of the things going on in the background,” Palladino added. “Just using Quickbooks and plugging things in can get the owner into serious trouble, tax problems and cash flow issues. It’s all about getting the right person involved at the right point of a business.”
Passion taking the place of reason.
“Often when people start a business because they’re passionate about something, they know little about the realities,” Palladino explained. “We often get people coming in here (MISBTDC) for help because they’re passionate about an idea and want to turn it into a business. While it’s wonderful to have passion about something, often times that passion blinds people to the reality of the business model they’re creating…sometimes the passion doesn’t look at the business aspect.”
Restaurant people fall for this a lot. Asked why they want to open a new restaurant, they either want to because their friends tell them they’re a great chef or they love serving people or they love being creative with food. On average, they must be prepared to spend 70 or 80 hours a week working in their business. They tend to push reality aside.
Inexperience in the specific business.
New ideas can be just the thing to help a business succeed, but it should come with some previous knowledge of the business type. “Get them into some sort of education and make them slow down,” Palladino suggests. “The idea is still going to be there in a year. They should work in the business for awhile to get experience and learn what its like inside that business before they start their own…create their own internship.”
“About 90 percent of the people who come in here (MISBTDC) don’t account for enough marketing in their start-up business portfolio,” Palladino said. “You can’t do it with one big ad, you have to be constantly in someone’s eyes…the concept of needing to find a way to rent space in their mind…continually advertising.” MISBTDC emphasizes good marketing as part of a start-up business strategy.
Zoning and environmental regulations are rapidly changing and businesses must comply to the new regulations. Licensing and permitting also can be burdensome. If entrepreneurs haven’t done this before, they might not know whom to contact.
“One of the hottest things around, is doing entrepreneurial small scale, on the farm processing,” Wieland said. Recently, some of the poultry producers in the area began receiving letters, stating they were required to pay a ground water discharge fee. Actually, they were too small to be assessed the ground water fee. With the cost of the permit, it would have put the small poultry farms out of business. A couple of advocacy groups that work with small scale entrepreneurial farmers sat down with MDEQ and Michigan Department of Agricultural officials and negotiated an exemption for the farms.
Underestimating the competition.
“People’s passion in their ideas tends to blind them to the fact that their idea is the most unique idea in the world,” Palladino pointed out. “They don’t want to believe that there are other people with similar ideas.” MISBTDC tries to get people to take a good clear look at the competition. A competitive analysis should show what is really out there in detail.
Hiring the wrong people.
Businesses want to save money, afraid of paying a little more for an employee. It may not even be a matter of pay, sometimes businesses just hire people too quickly without evaluating what they need from that person, what the position really requires.
“From the viewpoint of retail, a business had better spend of lot of time determining how that person deals with people and under stressful conditions,” Palladino said. “People come back for people.”
Being complacent in the market place.
After being in business for awhile, complacency sets in. The business owners think they are doing fine. “Then something changes…a new technology, a new business model, and it’s like they’ve just been run over by a truck,” Palladino emphasized. “They didn’t keep up with due-diligence in the market for their product. Another business may have developed a better product or technology for the same thing they’re producing.”
Finding the solutions for businesses’ stumbling blocks.
Try networking with other business peers or “Get a mentor,” Palladino suggests. “Find a personal mentor that has some experience in your type of business.” This mentor may have either run a similar business or worked in the same business.
Talk to counselors, such as MISBTDC. “MISBTDC provides three things,” Palladino explained. “One on one counseling services for businesses (confidential to the extent of the law) and we work with business to assist them in business planning, business development, marketing assistance, cash flow and financial analysis, plus management.”
Second is training, where small business classes are provided through the community colleges and in house at MISBTDC, either generic or specific training.
Third is research, which is market research for businesses through a close relationship with Grand Valley State University’s Seidman College of Business. Graduate assistances provide the marketing information and demographics for the area of the businesses through MISBTDC.
• The Service Corp of Retired Executives (SCORE) is funded by the Small Business Administration and has a chapter of 70 retired executives in Traverse City. They are available for counseling.
• The Executive Corp (TEC) helps company CEOs. Since 1957, business leaders have been going to TEC to accelerate the growth of their businesses and themselves. That growth comes from one-on-one executive coaching.
• The Product Center for Agriculture and Natural Resources is an entity that has just come on board statewide, with personnel acting as counselors for farmers throughout Michigan. There is also the Michigan State University Extension program for advice.
• Local community colleges have business departments, where classes are offered that help in writing business plans, services, research and training for businesses.