Why businesses fail (part 1): they run out of money before the business breaks even

???????????????????????????????We’ve all seen it. An entrepreneur opens a new business, but before long we notice it’s closed. The classic example is a new restaurant, often in a location that has been the scene of more than one failed restaurant before. They ran out of money before the business broke even. The time and money they spent is gone, and their lender probably has a claim on their home and other assets.

How does this happen?

First, they didn’t have enough industry and management experience. It’s good to have a passion for a business, but if you haven’t spent enough time working and managing in that kind of business, there’s a good chance you will over-estimate your projected revenue and under-estimate the problems, delays and costs that will confront you. And you may not know enough to anticipate and avoid them.

What should you do instead?

  • Start a business in an industry where you have work history and management experience.
  • If you don’t want to stay in that industry, get a job in the industry that interests you. Yes, this will delay the launch of your new business, but it can also delay big financial losses and a lender having a claim on your house. Besides, once you get some experience in this industry, you may not like it either.
  • Recruit a partner who has relevant industry management experience.

SCORE counselors are available locally or on-line to help you create and manage a successful business. Call us in Pinellas County at (727) 532-6800 or go online  to www.pinellascounty.score.org.

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How will I know if I have a good business system?

Chefs

According to Gerber, there four essential ingredients of a successful business system:

It creates the right impression for the target market. The impression is created by product, packaging, retail displays, advertising, signage, your web site, the way you and your employees are dressed, the way you answer the phone, the appearance of your parking lot … everything.

It appeals to the emotional needs of the customers and employees. People need to be heard, to feel that that what they do is important, and to be connected to something larger than themselves. Think about customers of Apple Computer and the employees who create the products for them.

It is organized to produce the best results with imperfect people. A great system turns ordinary people into extraordinary people. Everyone knows what their role is and how they contribute to the success of the company. The system has high standards. It works predictably even when the owner isn’t present. You do plan to take some time off, don’t you?

It has financial integrity. The business earns a profit, customers are charged correctly, employees and suppliers are paid on time, and investors earn a good return. All four groups – customers, employees, suppliers, and investors – get more from your business than they can expect from any competitor.

Start by choosing the right business and the right customers. When you start your business, focus on the entrepreneur role. It’s hard to stand out in a commodity business where prices and margins are low, and products or services are almost interchangeable.

  • Look for an important problem or opportunity experienced by a lot of people.
  • Reach out to customers who value what you do and will pay appropriately for it.
  • Create a system that exceeds the expectations of these customers. Set standards that make your business stand out. Improve the system as you go to keep up with changes in customer expectations.

SCORE counselors are available locally or on-line to help you create and manage a successful business. Call us in Pinellas County at (727) 532-6800 or go online to www.pinellascounty.score.org.

Image courtesy of Jessa-Minnie via creative commons license.

Sell the business, not just the product – but how?

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Find out what your customers want, and create a system that does the best job delivering it.

Several years ago, Michael Gerber wrote a book called “The E Myth: Why Most Businesses Don’t Work and What to Do About It”. Gerber’s message: the customers buy the total results of the business, not just the technician’s product or service. Sell the business, not just the product.

For a good illustration of this idea, check out our previous post.

A successful business is designed as a system that delivers consistent value to its customers and its employees – that gives them (and its investors and suppliers) more than they can expect from any competitor. After all, a business can’t deliver excellent products and services if its employees are unhappy, if the business isn’t making a good profit, and if its suppliers aren’t getting paid on time. It’s extra hard to deliver on time if your business is on ‘credit hold’ with a key supplier.

The system is a structured way of doing business that works predictably and profitably, and sets the business apart from its competitors. According to Gerber, the system produces results, and your people manage the system. This is true even if ‘your people’ is only ‘you’.

This is where you take on the third critical role of a successful business – the manager role. The manager organizes the business created by the entrepreneur. He or she wants to make sure invoices are mailed, customer payments tracked, supplies ordered and checked in, bills and employees paid, and all the other details that  both the technician and the entrepreneur would rather avoid are covered.

McDonald’s is well known as a franchise that depends on systems and operations manuals (an article in Entrepreneur magazine says the McDonald’s operations manual is 300 pages long). They make it easy to train new employees to deliver high quality consistent products and service. But McDonald’s didn’t start out as a franchise with more than 33,000 locations around the world.  It started with the McDonald brothers and Ray Kroc. Kroc was attracted to McDonald’s because of the innovative assembly-line process the brothers created.

Your business doesn’t need a 300-page operations manual to be successful. But it does need processes and structure, so your business can run smoothly without you being there. You do plan to take some time off, don’t you? If you’re the only employee right now, this is an ideal time to set up and test your system so it will be ready for your first new hire.

SCORE counselors are available locally or on-line to help you create and manage a successful business. Call us in Pinellas County at (727) 532-6800 or go online to www.pinellascounty.score.org.

Image courtesy of crschmidt via creative commons license

Why a great business beats a great product

Some of you may be thinking that a superior product should always win over a superior business. This story written by Ivan Widjaya in Small Business Trends should change your mind.

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“In most businesses, return customers and word-of-mouth are what will make you successful. Using the burger analogy, let’s run with a fictional customer service scenario about two different burger joints:

Exhibit A: The first burger place (Let’s call it “McGurdy’s”). Customers are greeted with a smile and the staff is taught to take their time answering any and all questions the customer might have. Each staff member is paid above minimum wage and the atmosphere is one of teamwork and positivity.

The burgers aren’t going to be featured on Gordon Ramsay’s signature menu at Caesar’s Palace, but the health standards are excellent, the service impeccable, and the food is on par with other fast food joints.

Exhibit B: The next burger place (“The Burger Pit”) makes the best burger mankind has ever tasted. This little shop is run under the thumb of one man; a surly old fella who screams orders at his staff, who get paid the minimum pay allowed by law.

The customer service staff jumps every time the old fella yells, often interrupting the customer service flow and interaction. The old man screams at staff for “talking to customers for too long” and tells customers who complain to leave his store and never return. The health standards are impeccable under the iron rule of the old fella, service is slow and disjointed, and the burgers are a fantastic experience to say the least.

Which would you choose? Naturally, customers will choose the best burger on the planet, no? After all, the quality of the product should dictate popularity. But it doesn’t.

Customers want to feel respected and listened to. Very few return customers would go to the Burger Pit over McGurdy’s because going to get the best burger means their patience is likely to be tried to the extreme, and they might have a downright unpleasant experience. The majority will go where the combination of product quality and service are best (a “happy medium” in the absence of a business that truly has all elements of their product and service covered.)”

To read the whole post, go to http://smallbiztrends.com/2014/02/customer-service-matters.html

SCORE counselors are available locally or on-line to help you create and manage a successful business. Call us in Pinellas County at (727) 532-6800 or go online to www.pinellascounty.score.org.

Image courtesy of Thomas Laurinavicius via creative commons license.

Think technical skills are enough to run a successful business? Think again.

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That’s what Michael Gerber says. Several years ago, Michael Gerber wrote a book called “The E Myth: Why Most Businesses Don’t Work and What to Do About It”. His basic message: understanding the technical work of a business (for example, photography for a photographer or electrical installation and repair for an electrician) is not enough to be successful.

According to Gerber, the idea that technical skills are enough to succeed is responsible for the high rate of small business failure. Two other business functions – the manager role and the entrepreneur role – are just as important. As SCORE counselors, we still see clients who suffer from this misunderstanding.

What does this mean to you? Gerber tells us that the technician looks inward to define his or her skills, then looks outward to ask ‘how can I sell them?’ This thought process will satisfy the technician, but not the customer. The entrepreneur identifies a group of customers to be served, then creates a business that will meet the needs of these customers. The customers will buy the total results of the business (not just the technician’s product or service), creating revenue and profits.

The customer buys their total experience with the business, not just the product or service. Previous blogs show how the entrepreneur can build the total business by focusing on the nine critical elements of the lean startup process.

SCORE counselors are available locally or on-line to help you create and manage a successful business. Call us in Pinellas County at (727) 532-6800 or go online to www.pinellascounty.score.org.

Image courtesy of Thomas Laurinavicius via creative commons license.

Why should startups pay attention to the Lean Startup Method, anyway?

image courtesty of brizzle born and bred under creative commons license

image courtesty of brizzle born and bred under creative commons license

We’ve spent several blogs presenting the most important features of the Lean Startup Method. As a startup business, why should you care?

Lots of startups follow a more traditional path to build their business:

  • Write a business plan using market research (but almost no actual contact with potential customers, suppliers, partners, or sales channels)
  • Get startup money (self funding, friends & family, banks or rarely angel investors or venture capitalists)
  • Spend the money building a business
  • THEN reach out to potential customers to find out if they want what you are selling, and are willing to pay enough for it to let your startup earn a profit.

As Steve Blank reports in his book “The Startup Owner’s Manual”,

the embarrassing fact is that in companies large and small, established corporate giants as well as new startups, more than nine of 10 new products fail

He goes on to say,

Winners also recognize their startup “vision” as a series of untested hypotheses in need of “customer proof.” They relentlessly test for insights, and they course-correct in days or weeks, not months or years, to preserve cash and eliminate time wasted on building features and products customers don’t want.

 Founders must search for a business model. The best way to search is for the founders themselves to get out of the building to gain a deep, personal firsthand understanding of their potential customers’ needs before locking into a specific path and precise product specs … Getting out of the building means acquiring a deep understanding of customer needs and combining that knowledge with incremental and iterative product development … Products developed by founders who get out in front of customers early and often, win.

Three of the “deadly sins” of the traditional startup method, according to Steve Blank, are:

  • Assuming “I know what the customer wants”
  • Assuming “I know what features to build”
  • Assuming no trial and no errors

Go through the steps outlined in the previous blogs to confirm that there are customers who have the problem you think they have, feel an important need to solve the problem, and are ready to pay you for your solution to the problem. Expect to make several mistakes while you are doing this. When this happens, “pivot” by changing one of your assumptions/ guesses about your customers and solutions.

When you have chosen a customer set and a solution, your next step is to test your assumptions/ guesses about building the business to a successful size. Here you will be testing your assumptions about pricing, how customers will be acquired, and what channels will be used. The test includes asking customers for the order and trying to collect money. Expect to make more mistakes and do more “pivots”. If you continue to get “go” signals from these tests, then you should have the confidence to start spending money and building your business.

SCORE counselors are available locally or on-line to help you navigate the path to a successful startup. Call us in Pinellas County at (727) 532-6800 or go online to www.pinellascounty.score.org.

How to Start a New Business Using the Lean Startup Method (part 9 – costs/expenses)

photo courtesy of NVarchitect under creative commons license

photo courtesy of NVarchitect under creative commons license

Launched in tech university entrepreneur programs in California, the Lean Startup Method is expanding to other universities across the United States. After studying the failures of tech startups, the main goal of the Lean Startup Method is to eliminate all time, energy and money spent on creating products or services that nobody wants to buy. This method is intended for startup businesses, but it can also apply to existing businesses that want to grow.

The Lean Startup Method involves several learning steps. The last step is to identify your costs and expenses. Your costs and expenses depend heavily on the target market, revenue streams, key resources and key activities that you have already selected for your new business.

After you have

  • found your target customers
  • confirmed by speaking to them that they have problems they you can solve
  • let them convince you that they will pay for your product or service by asking for the order
  • identified a cost-effective way to reach the customers and deliver your product or service to them
  • focused on the key resources, key suppliers or partners, and key activities needed to be successful

Then you are ready to go back to these previous decisions and find the costs of product or service delivery, key resources, suppliers/ partners, and activities. Do the analysis needed to be sure you can make a profit in your new business, before you run out of money.

If your analysis tells you that your business can’t be profitable or will run out of money before it becomes profitable, this is another time to “pivot”, go back and re-examine the decisions you made in previous steps. Either you have a bad business model, or your startup is undercapitalized. Test some new ideas.

Before you have reached this point, your goal is to preserve your initial capital while you are searching for a successful business model. Once you believe you have confirmed a successful, scalable business model, you goal changes: start spending to build the business, create end-user demand, and set up a sales channel to turn the demand into revenue.

One of the major reasons that startups fail is that they don’t have enough capital to pay the expenses before the business starts to earn a profit. Don’t let your business become one of them. SCORE counselors are available locally or on-line to help you navigate the path to a successful startup. Call us in Pinellas County at (727) 532-6800 or go on-line to www.pinellascounty.score.org.