And Why It Will Happen to You (Maybe) and You Won’t Be Surprised – Part I of II
A colleague gave me a stat yesterday, one that we’ve all heard before in one permutation or another and one that (much like the divorce rate) we’ve all pretty much just came to take for granted. Something like, “80% of Small Businesses fail inside of two years.” Now this is a very meaningful (and potentially frightful) stat for him as he, of course, is running a small business in its first couple of months.
His expression relayed that he obviously did not expect my reaction -Â I laughed out loud.
Now unexpected laughter is one of the biggest instigators of curiosity there is. And I love it – I’m a BIG fan of curiosity. Never enough of it in the world, if you ask me.
Hence this article.
Here I’m going to address the two most interesting (to me) reasons that Small Businesses fail. The first is easy to understand (but hard for most people to really get through their heads), so we’ll get through it quickly. The second we’re going to spend some time on, ’cause I fully believe it’s the secret to ultimately succeeding. And we all love a secret, don’t we?
The First Reason: CASHFLOW
Okay, this may seem somewhat obvious, but I rarely see people take control of this issue. Great business ideas don’t matter; Great products don’t matter; Great services don’t matter; Great Staff doesn’t matter. I mean all of that matters of course, but NONE of it matters if there’s no money coming in. Most people think that if you have all that stuff that the cashflow will somehow happen automatically. I’m sad to say that it often doesn’t play out that way (hence 95% failure rate). So here are five questions our team asks ever Monday morning at our strategy meeting. If you can’t answer them, you are doomed. Doomed I tell you! (Ok, I may be dramatic, but this is fun)
- Where’s the money coming from today?
- Where’s the money coming from next month?
- Where’s the money coming from 3-6 months from now?
- Where’s the money coming from next year?Oh, and let’s toss in one more, just for fun, ’cause – taa-daaa! – you will be wrong every once in a while.
- What if you’re wrong?
That’s it. You can make money a dollar at a time or a million at a time, but you better know where it’s gonna come from. And I mean KNOW – not allowed to guess. There are a bunch of details and components to those questions, like Sales, R&D, Acquisition of Customers, Drop-out Rate, Recovery Rate, stuff like that. If y’all email and ask for it, I’ll fix ya up a column that breaks it down.
The Second Reason: ‘CAUSE THEY’RE SUPPOSED TO!
Here’s how it really is, via “The Parable of the Hurdlers” (by me).
Take two people.
Put them on a track.
Put up some hurdles.
Ready, set, go.
Both get over the 1st hurdle. Great. Both get over the 2nd hurdle. Neato. Both get to the 3rd hurdle.
Both fall on their butts.
Runner #2 gets up. Turns in his uniform to his lawyer. Goes to his banker and gets another one. Goes back to the starting line.
As long as he was careful and had a good lawyer: he still has his house; still has his car; may even have more money than he started with.
Runner #1 gets up. Admits he failed. Throws the uniform into the trash. Gets a job raking the track.
So, #1 will rake the track. Watch football games. Will never go bankrupt. Will go a couple of thousands of dollars into credit card debt. Will actually keep trying to pay down his mortgage. Will have stuff from ChinaMart. Will never go hungry – will have barbecues. Will worry about money. And will always believe that he should have been able to make his business work!
And he’ll be right. I only he understood the rules of business and was willing to fail a few times to figure it out.
#2 seems to get more money each time he goes around the track, no matter how far he gets, whether he clears one hurdle or twenty. He may never get Super-Rich, though odds are more in his favor. He will go bankrupt – more than once. He will go millions of dollars into debt. He will never go hungry and he will have nicer stuff and take exotic vacations. He’ll always worry about money.
Call it what you will, on the “job” learning, seasoning, but people have to LEARN how to run a business and it is not typically taught in school. Ray Kroc started McDonalds at 52, after 35 years of successes and failures in previous businesses. Don’t be surprised if you fail, a few times, just pick yourself back up again an get your butt back on the track. And make sure you learn something from it.
Getting Preachy: The system has been “Gamed” so that failure is rewarded (for better and for worse)
Here’s why most businesses fail: the system has been ‘gamed.’ The business laws and financial rules in the US are such that failure is not really punished – if you do it right. So if you try enough times, one of your businesses will make enough money for you pay back the right people (uh, the bankers) almost by chance, even if you are an idiot (which gives ME hope).
We’ve come to the point where often the Idea has been replaced by gaming the system.
The IDEA is that the system should encourage the creation and the success of businesses. That’s our capitalistic system. Otherwise the government would have to provide all the jobs and all the stuff. That’s somebody else’s system. So that’s a great thing and the system should be set up to do it, right? The system should serve what it’s trying to do.
So this technique of setting up your business to benefit you when it fails is so prevalent that you might actually be at a DISADVANTAGE now if you do not do it! Of course 95% of businesses fail – it’s actually rewarded! For most businessmen, I wouldn’t go so far as to say that it is their actual goal, but I would say that it is their realistic expectation. After all, how often do you hear that the founder’s goal is to quickly ramp up something to go public and/or sell it off (for someone else to typically drive it into the ground) rather than build it to last? They really don’t believe, and therefore are not going to act as if their business will be a long term success. They just want to get rich quick (not an awful thing but not conducive to longevity is it?).
On the other hand, most normal people are still blinded by the IDEA. The Idea that the business should have goals and mission statements and be legitimate and honest and all that stuff. That a GOOD business will LAST. Then they wrap their feeling of self-worth in their business and feel that if their business fails that THEY have failed. So when the 1st try goes bad, they pack up and go back to a job, thinking they don’t have what it takes.
This is quite simply not true.
One must understand that the system has been gamed – that your competition is most likely gaming the system – and act accordingly. Ugh, you almost have to understand that gaming the system is part of the system. One must understand that the RULES matter as much as the IDEA.
Part II will be on “But I really want my business to SUCCEED!” The good news is this: If the rational person is willing to play by the rules (game the system only as necessary without loosing sight on the long term objectives), all those other parts of the Idea of a great business get a chance to kick-in and create something really special.