In ordinary conversations, when you ask an individual to define a business, they often paint a somewhat dim picture that features the most beautiful couple that typically run the local corner coffee shop, or the freelance graphic web designer diligently working out of their live/work space in the latest trendy part of town. Yet, it is much more than this. A small business is just that-a business. It is a business that has grown and adapted to changing times. It might be a one person operation, or it may be a corporation employing hundreds, but it is always a small business.
It’s important to understand the definition of “small business.” Unfortunately, we’ve become a world that revolves around big buildings with the CEO on the stage, handing out raises and bonuses, and promising the earth. What we do not discuss enough, however, are the many aspects of day to day operations that involve the small business owner. Herein, we’ll discuss some of those aspects.
One of the first challenges small businesses face is resource poverty. Resource poverty is defined as, “Relatively inferior access to needed and available capital.” This is not meant to be an all inclusive list. But, for our purposes, it focuses on the funding sources for most small businesses including loans. The lack of capital is one of the greatest obstacles to small businesses including start ups.
Another challenge faced by most small businesses, especially start ups, is employee retention. Most small businesses have fewer than two full-time employees. This means the ones you do have to hire quickly can’t last very long, as attrition rates are high due to understaffing.
Even in today’s challenging economic times, when economies around the world are recovering, there is still a perception that banks will not extend credit to small businesses. This is due to fears that the small business will not survive. This couldn’t be further from the truth. As with any growing large business, there will always be a risk involved. But this risk can be managed, and a lot depends on the management of the small business.
With our global economy is changing, it’s important that the rules set for new entrants, such as small businesses, are different than those applied to established larger companies. Many international banks have been successful at applying size standards that are designed to level the playing field internationally. These banks understand that small businesses have a unique set of circumstances, and they can succeed where larger companies have failed.
And, of course, many large US companies have been able to use government aid and state aid to remain competitive and grow even in tough markets. Granted, the government sometimes rubber stamps these ventures, but owners-managers are usually well-educated in how to get around these problems. New business growth often comes from new or small businesses being able to use resources and leverage available to them to their advantage. Some of these resources include their network of suppliers. As we’ve seen, many new small businesses use their network of suppliers to create better products, increase sales, reduce costs, and provide services that people want.
As we’ve discussed, the challenge for owner-managers comes when expenses must be reduced while profits are increased. In this situation, we encourage owner-managers to keep expenses down while revenues increase and in doing so we discourage over-spending. A key result from conducting a small business break-even analysis is that the most substantial savings come from reducing business expenses, not increasing revenue.
Many owners ask “What about all those tax credits?” After all, aren’t these supposed to benefit me? The reality, however, is that while the federal government awards billions of dollars in tax credits each year for business owners, only a small fraction of these credits are actually used by qualified small businesses. Even when they are available, it’s often very difficult to get an actual grant. That’s why virtually all of the revenue received through these programs ends up as either free cash flowing to other businesses or as a final distribution to agencies such as the Department of Education for the purposes of funding higher education.
Owners-managers should also remember that their goals should always be long-term. A company’s income statement and balance sheet will often provide enough information to show what a business will achieve over a few years before it begins to show any significant cash flow, let alone profit. Thus, it’s important to develop a sound strategy for managing cash flow, and to consider whether a new project is really needed. If a project is identified from the very beginning as being something that the business can do better with, or that is just going to be short-term in nature, there is a great chance that the business will actually lose money during its first few years of operation.
As one last point, I often recommend that my clients get an intercity MBA instead of going directly into business ownership. Why is this? Mainly, because an MBA provides the necessary experience to recognize that business concepts and models make sense in today’s marketplace, and which ones don’t. Thus, it’s rare that an intercity graduate will end up working in a business that is hopelessly outdated. Instead, I see my MBA students graduating with a clear idea of what kind of business would make them the happiest and most successful.