There are smart businesses and stupid businesses. Smart businesses grow profitably, generate cash flow, increase in value over time, and operate without significant input from the founders. Stupid businesses aren’t set up to do any of these things, and are destined to eventually fail.
Following are fifteen signs that you might have a stupid business:
- Marketing is not a priority. It is a sad but true fact that the most successful businesses do not always provide the best products or services. Often, less deserving businesses do better because they make marketing a top priority. If your business isn’t using at least seven different channels to get visible, then it is at risk.
- You do not have a detailed cash flow budget and projections. Cash flow and profits are not the same thing, and the number one reason businesses fail – even those with strong potential – is because they run out of cash. It is essential to know how much cash you have, and how much you will need in the near and mid-term. Use a variety of different scenarios to assure enough cash in case of unanticipated problems or delays.
- You aren’t developing sources of leverage. Businesses that last learn to operate without depending on the founders or owners. Smart businesses have standards, systems, and documented processes in place to provide leverage for owners and grow without depending on one or more key people.
- You don’t have an “edge” in your marketplace. If you are a me-too business offering the same service, pricing, and products as everyone else, you won’t last long. You need some sort of edge that matters to your prospects and customers and keeps them coming back. Your advantage can include proprietary technology, product leadership, operational excellence, unique distribution channels, protected sources of labor or supplies, and more.
- You provide lousy customer service. No business owner ever admits to providing lousy customer service, and yet too many businesses do just that. It is crucial to understand your customer’s expectations, know the “magic moments” when you can make or break the customer’s experience, measure results, train employees to delight customers, and put in place standards and processes to assure consistent service.
- Your business lacks focus. Entrepreneurs love to start new things up, and this can be deadly for cash flow and customer perceptions. Know what you do well, and for whom, and be the best in that niche. Don’t have visions of grandeur. Don’t try to own the whole world. It is expensive to launch new products and enter new markets. For instance, a local boxing gym decided to get into kickboxing and mixed martial arts. They quickly lost their loyal base of boxing clients, without attracting enough new martial arts clients. Fortunately, the owner saw his mistake and regained his focus on boxing.
- You don’t have the right people to succeed. Businesses need talent – “the right people in the right seats on the bus” as Jim Collins writes. If you don’t have systems in place to recruit, train, reward, and retain top talent, your business won’t last as long as it otherwise could.
- You spend too much money on things that are unrelated to getting more customers and meeting their needs. Larry Ellison of Oracle used to say, “If you aren’t making it or selling it, what are you doing here?” Prune your business expenses to focus on those activities that add direct value to the customer. For instance, I worked with one business that had huge legal expenses related to contracts, trademarks, and patents. The business ran out of cash because of these costs. It would have been smarter to first test its products, use do-it-yourself legal services, and then spend money protecting its assets after proving market demand.
- You don’t set a clear direction that every employee understands and embraces. Many business owners keep their strategy and goals in their head, without communicating clearly to employees. It is much more powerful to have a dialogue with employees about where you want to take the company, what it can do best, how it can make more money, and resources required to get it there.
- Your fixed costs are too high. Constantly find ways to reduce fixed costs. Thanks to technology and the increased acceptance of contract labor, you can have a lean, mean, virtual organization and avoid huge overhead.
- Your attitude is wrong. One of the biggest reasons businesses don’t last beyond the life of the original owner is because the owner cared more about ego, status, and maintaining control than on having a successful business. Strong business leaders surrender control to top talent, and place greater emphasis on bottom-line results than on their status or ego.
- You don’t live by metrics. The best businesses pick a few key things to measure and constantly improve on those metrics. Examples include: number of leads, conversion rate, dollars spent per transaction, repeat business, and gross profit margin.
- Your business fails the five forces test. Michael Porter devised the five forces model of competitive advantage. If you don’t have lots of control over your vendors or customers, face significant government regulation, work in a highly fragmented industry with lots of competition, and anyone can easily enter your industry, then your business could be set for lots of trouble.
- Lots of cash goes out before cash comes in. If your revenue cycle requires large outflows to generate cash inflows, then you are perpetually at risk of losses. For instance, imagine an event promotion company that needs to put down huge deposits in the hopes that lots of people will come to the event; that is a highly risky business and it is no wonder that so many promotion companies come and go.
- You can’t easily predict future revenues. The best businesses know that $X in marketing will generate $Y in sales, every time. The worst businesses face highly unpredictable revenue streams. To bring back the example of the promotions company, it is extremely difficult to know on a given date whether lots of people will come to an event or not, especially events with large ticket sales the day of a show. Poor weather, competing events, local traffic jams, and shocking news can all ruin an event.
If your business meets even a few of the above criteria, I wish you the best of luck. You are going to need it.