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January 24, 2016 / paulio10

Why Most Small Businesses Fail

I figured out why it is so hard for most people to start a small business and make it successful.

It is because there are two factors working against them, not just one, based on their past training and experience – things that they have to completely change in themselves to run a successful business.

The first thing is obvious to most people, and it’s the only one they think they have to deal with (but then there’s a second, more subtle one I will explain in a moment).

The first factor working against the small business owner: when I start my small business, I am in charge, I am the decider.  I get to decide what things get done, and how, for my business.  What products or services my business provides, and how we’re going to produce or provide those things.

Most people get excited about it because they have an experience in the past, they know how things weren’t done right by others, and they know how things can be done better, and more correctly, without knowing any of the side-effects of their better method; or the origins of why things were being done the “wrong” way; which is fine, they’ll learn this over time; they’ll realize things they need to change over time.  These aren’t big obstacles.  If they can’t bring themselves to change anything, they insist on running it their way even if parts of it are not working right, then their business probably will go under. But most people do not have that problem, and are willing to be flexible largely, when obstacles occur, in finding ways around the obstacles, and changing how they achieve the ultimate goals of their business, to be successful.

You have to be flexible and become good at finding the root-reasons behind problems (especially recurring problems), and find how to solve the root of the problem, so that the problem is solved permanently. People don’t have to study the science of root-problem-solving, they often will home in on this eventually.

The big mistake people make though, almost all small businesses have this problem, and some never get past this point; is that they think that they, the owner, has to do all of the work!  Now that I have defined what the work is, I know how to do the work, it’s often an area of expertise for me, probably even an area of excitement for me; because otherwise why would I have gotten in to this small business in the first place? There’s plenty of different small businesses I could have started; there was something in particular that drew me to this specific small business. It could have been past experience, past knowledge, and possibly excitement, enjoyment, fun of doing the particular work for this business.

They get stuck with the idea that they have to do the work. They quickly make this decision, which they don’t even know they’re making – because it’s just what they’ve always done! Their experience as an employee was “somebody else made all the high-level decisions in some ephemeral business I worked for, and defined what we’re going to do and how we’re going to do it; and they told me “go and do all these steps I tell you to do.”  Here’s the Plan.  Here’s the tasks.  Oh, and how are you coming along with your tasks?  Where are we at? Give me an update every week or every day. What obstacles do you have? Let’s have meetings to talk about that. Let’s write a document about that. Let’s share it with other stake holders and managers.  So the person who is starting the small business knows that they are in charge of all that, and it’s probably just them (or them and their partner), and planning consists of talking about something for 10 minutes, and boom, decision is made, and you can run with it.  (of course that part is a lot easier in a small business).  But who’s going to do the work?

The mistake most small business people make is that they think they themselves have to do the work. I’m the business owner! It’s my responsibility! I have to be successful at this, or the entire business fails! I know how to do the work! I know better than anyone! If you want it done right, do it yourself! I love this work!

As a result, they immediately bottleneck their business and limit the success their business can have, because they themselves (or they and their partner) are a finite resource – there’s only so many hours in the day, only so much work a person can do in one week, one month, one year of time. They quickly become overworked, while not making enough money. That is an impossible situation to get out of without changing something drastic about how they think. But they don’t even know what to change, they don’t even suspect anything is wrong with what they’re doing!

The second factor working against the small business owner – the vitally important core realization, which most small business owners don’t understand because they’ve been employees all their life, is:

I’m not going to do any of the work.

My job is to set things up so that other people do all of the work.

I define what the work is, I guide it, I give training about it, and I make sure it’s happening properly.

I build a system (maybe many systems) to make sure that the right things happen and problems are corrected, missed things won’t be missed in the future, and so forth.

It’s really about guiding and shuffling, directing, rather than doing any of the actual work.

But of course, you’re a small business! So even if you hear these concepts, even if you know that this is what you need to do, it still feels impossible, and you say, “I don’t have the money to hire someone to do all this work!” Or you say: “sure there’s a big chunk of work right now, because of the contract we just signed, I could hire someone to do this, but then I have to fire them next week when it’s all done, and then hire them a week or two later with the next contract, and fire them again one week after that, because the work I have is very spotty, not consistent.

They’re thinking too small if half a day of lost work (of paying an employee for a full day, for example, and not having anything for them to do for half a day); if that is a big risk to the business, then they’re thinking too small about their business, they’re doing it wrong. They need to ramp it up to a bigger level, because here’s the thing: if you have one employee, and they don’t have any work for half a day, that’s a giant impact to the company; but if you have 10 employees and you don’t have work for 1 employee for half a day, that’s a very small glitch; that’s not so bad.  9.5 out of 10 workers working is still most of the work being accomplished.  But 0.5 out of 1 workers working is a huge impact; 50% efficient.

So the business needs to ramp things up. Because if they do that, the business can make way more money. Way way way more money, for many reasons; first: you’re moving more product or providing more service to more customers – so naturally, whatever your percentage of profit is multiplied by the bigger numbers, so your profit is bigger. That’s obvious. But you also get the benefit of Economies of Scale; if you have to buy 1 roll of toilet paper, that’s a certain price. If you buy 10 rolls of toilet paper, you get a discount; less cost per roll. And if you buy 3,000 rolls of toilet paper, I guarantee you’ll get a better price per roll than buying 10 rolls at a time.  In fact, you could sign a contract with a toilet paper manufacturer to deliver 500 rolls of toilet paper every week on Fridays at 2PM. Things like that. Economies of Scale gives you more profitability for your business, which can then be slightly absorbed by having a little bit of slack-time by one or two employees when it happens once in a while.  The cost is covered.  You have a buffer, a bit of room for error, which you didn’t have when the business was too small (3,4,5 people working the business).

So at the very beginning, yes of course, the owner (you) will probably have to do most of the work. You’ve got to get out of that phase as fast as possible. There’s a huge difference on planning & directing a business, versus doing the mundane day-to-day work on the business.  You should be working on your business, not in your business. Print this out, write it down, recite it, put it on your wall where you work and re-read it every day:

You should be working on your business, not in your business.

You need to work on your business – you are the boss, you’re in charge of everything! This business will fail if you do not do the most important things in a timely manner for your business.  Those things all revolve around working on your business – how the business operates, what people are supposed to do, when and how; creating the processes and plans.  Being consistent, and communicating clearly, so customers know what to expect. Not just focusing on your current products, but planning future products. Not just looking at your current marketing and advertising, but your future marketing and advertising. Not focusing only on your current customers, but focusing on who your future customers are going to be. New markets, not just existing markets. Which supplies, and suppliers. What is the future? Where is it going? You are the captain at the helm of your ship. Where is the ship heading? How are you going to grow your business?

People who work on their business, eventually have to work less hours each week, not more hours, because the business starts to run itself. You know you are being successful at working on your business instead of in your business, when the profits and sales go up, but you have more time to spend with your family, doing personal things, rather than business things. The best business people experience this extra spare time as their business grows and their income increases.  People with an employee-mentality associate time with money – to make more money, I have to spend more time. But being a real business owner works the opposite of that: if you’re working harder and harder over time, you’re doing something wrong.

Ask yourself this: what is my plan to double my business in the next 2 years? Think about the level of business you’re at now, and try to double it in 2 years.  Maybe it will take 3 or 4 years to do that, but the plan gets created now – and the steps are taken now, to get there. You might achieve it in less than 2 years. It just depends. You’re going to grow your business starting now.

There’s many reasons why you need to plan on growing your business. One unexpected reason is: a large percentage of your current customers are going away – they will be irretrievably lost to you as customers. People move away, people switch brands, people get tired and bored and leave and go somewhere else.  So what is your plan for getting many new customers, lots of new sales, just to counteract the natural loss that your business is going to go through? This loss of business is normal, and you have to account for it.

Treading Water

I learned this very clearly when I joined a group of business people who met weekly to do networking. I belonged to this group for 2 years, and they had roughly 28 people in the group the whole time I was there.  Occasionally there would be as many as 31 people, and sometimes as few as 25 people, but it always recovered and stayed right around 28 or 29 people the whole time I was there. It was clearly in everyone’s best interest to stay with the group, to get more sales – yet there was a constant flow of people leaving. The only reason it was able to maintain its size was because we constantly invited new small business owners to visit once a month to experience our sharing of leads and referrals, people who had never been to a group like this, people like us that were trying to improve their business sales. But you know how that goes. Of the 50 people you invite, 20 of them will actually show up. And of the 20 that show up, 7 will actually sign up to join the group. And of those, 2 or 3 will actually stay for 1 year or more. Meanwhile, various other people who have already been with the group for a while decide to leave for various reasons unrelated to the group – so there is a constant flow of people leaving and coming, leaving and coming. What do you think will happen to that group if they stop inviting new people to come and join? That group will shrink and shrink and shrink, until it finally disappears. It can’t sustain itself. Your business is the same.

The concept here is very much like Treading Water.  Think about it.  Treading Water means you move your arms and legs in a certain pattern that you have practiced many times, to just stay where you are. Because if you ever stop moving your arms and legs, your body will sink and your head will go below the surface of the water, and you won’t be able to breathe air. You’re treading water just to keep breathing. When treading water, you’re not exercising real hard, you’re doing the minimum work it takes to maintain your minimum position in the water so that your head stays above water.

Your business needs to tread water. You have a current customer base, but people are going to leave; so you need to continually be increasing your customers to make up for at least the number who are leaving all the time.

So now – knowing that, you start thinking about other sales models. Is there a method I could use to lock people in, so that I don’t lose customers so fast? One way is to change your business from a single-purchase model to a subscription-based model. Especially if your product is a series of elements, for example, episodes of a TV show, or episodes of a Podcast – if your product is a weekly or monthly Podcast, then you shouldn’t be asking people to contribute only one time.  That’s crazy. You should be asking them to contribute on an ongoing basis. Because they’re getting value from you on an ongoing basis!  You’re working your butt off on an ongoing basis to provide new content! You’re producing content constantly, so the money needs to come in constantly.

Your payment model needs to match your products or services.  It’s got to make sense.  Software companies are figuring this out now. Look at Adobe. They specialize in an assortment of graphical and visual editing and composition software products like Photoshop, Illustrator, and so forth. They have some of the best cutting-edge products out there. There old model was: you buy it once, install it, and use it forever. But they couldn’t make as much money that way as their new model. They adopted the Cloud Computing model, where the customer subscribes to a monthly license, and has a right to use the latest version of the software, always keeping up with the newest version over time. So they get money every month, every month, every month. The software checks online for its license: did they pay this month?  Oh yes, OK, I will run then. Oh they didn’t pay? OK, I won’t run, but I will remind them to renew their subscription. It’s so easy. Here’s how to do it. Your license expired on this date. Do you have your credit card ready? Here’s how you renew. I have your credit card on file, do I have your permission to renew? Here’s how much it will be, and how long the license will last. You need to click here, type this, do something to give us permission to charge you.  Or, set up an automatic billing agreement – so that it automatically charges the monthly license fee, because that’s what the person agreed to up front to get access to the software. They can cancel at any time – you’re not tricking anybody, they can come and go as they please.

Make sure that you make the whole process super easy – super easy to sign up, to download and install the software, make sure it will work on every platform and style and aspect of computer/phone/device that they might potentially be using.  And it’s a moving target over time – as new hardware and operating systems come out. So there will be an ongoing cost to keep the software working on all modern platforms, but luckily, the billing model brings in the money constantly to cover those costs.  It’s a well thought out model that works for everyone.  People need to keep up with the latest version of the software. You’re helping them do that – as they pay for the latest thing, you make sure they have access to the latest thing.  All bug fixes get propagated to all customers. All new features are shared with all customers, and you make sure to brag about it to your customers, so they know the great improvements that are pushed to their system without them having to lift a finger. If they pay you every month for 10 years, you’re happy to provide them free upgrades the whole time – thank you for being such a dedicated customer to our company.

Whatever the easiest thing is, whatever the default thing is, that is what 90% of your customers are going to do. If the “default” is to not pay you, because they already paid once, then you won’t get paid each month. It will be like pulling teeth.  If the default is to pay you every month because they subscribed to your services, then guess what – that is what’s going to happen every month. I’ve seen this happen in my own life. And I’m a stickler for unsubscribing to things quickly, and not letting companies cost me extra money needlessly over time.

But I needed a cloud product from Adobe for about 2 months. I ended up not canceling my subscription to that cloud product for about 6 months! So they got 4 months of free money out of me before I had the mind and sensibility to cancel it. So instead of paying $60, maybe I paid $180 total. And that seems to be fine to me, I justified it as a business expense for that particular project I was working on at the time. That was the cost for me to use that product at that time, it was a bit higher than I expected. I probably could have called and bugged them to get a partial refund, I didn’t feel like spending the time and headache to do that; I just canceled when I felt like it, and they stopped charging me at that point.  I felt comfortable enough with that, that I would sign up with them again if I need that product again in the future.

Tickler File – Your Perfect Reminder System

By the way, that’s what a Tickler File is for, to remind you about stuff that you’re going to forget about, on a specific day in the future. Because you’re going to forget it.  It’s human nature.

Some people use a calendar app for this, but I don’t recommend it. Because there are concepts that Tickler Files solve which no calendaring app has ever solved properly.

You can have the concept of: remind me about (this thing) roughly 1 month from today, but if I don’t act on it for a week (or two), that’s fine, but once I act on it, file it away for another month from that time. That is a super important concept.

Let’s look at an example. Let’s say you have a tickler item to back up your computer on to an external hard drive. Well, I know, there’s a lot of online backup systems on the Internet today, the truth is that you want both, a cloud backup system and a physical media backup system like a little external hard drive you can hold in your hand to back up your PC or laptop. You want both of those things. You’re likely to have to run that local backup to a hard drive manually (unless you find a way to automate that too).  But if you do that, now you need to check on it monthly – which means you need a tickler item for that – so you’re going to have a tickler item no matter what.

You put a tickler item that says “1 week from today” or “1 month from today, here are the steps to do the backup”.  You want to make it as easy as possible to do it right, so you don’t put it off, leave it sitting on piles of paper on your desk, to get buried and lost and forgotten.  You don’t want to have any reason to avoid doing it. You write it on a full sheet of paper, and put it in your tickler file folders.

One month from now, when the tickler file brings this folder to your attention, you pull the paper out and exclaim, “what is this? Oh that’s right, I need to back up my computer! I wish I remembered how to do that! Oh, look, I wrote all the steps right here; I guess I should stop what I’m doing and quickly do these steps right here.” That’s great, that’s so important.

Then next month your tickler file brings that paper to your attention again, and you say “oh yea, backups, has it really been a month? OK, I know it’s important but I have this other thing going on right now so I will leave it on my desk and do it later.”  3 days from now you find it on your desk and say, “oh crap, I needed to do this.  OK I will schedule myself to do this tomorrow. I will leave it on my desk.”  So 4 days have gone by since you were scheduled to do your backups.

So, assuming you do the backups that next day, then think about this: when should the next backup date be? You don’t need to do it 1 month from when it WAS due 4 days ago. You need to do your next backup 1 month from now – 4 days later – the schedule has now slipped by 4 days. And that is OK.  The damage is already done- the 4 day slip already occurred.  So now you’re filing away your tickler item paper 1 month from today, so you see it at that time. The sheet of paper doesn’t say “do this on the 5th of the month,” it says “file away 1 month from today”.

Calendaring apps don’t support this concept. They support the “5th of the month” concept. Which is valuable for some types of reminders, like paying your bills – you must pay most bills by the proper day of the month or you will be charged a late fee (or worse).  So slipping that schedule results in having to get back on track – a calendaring app is perfect for that.  But not everything is like that.  If you want to touch bases with your adviser once a month, you might use the Tickler file method of never calling them 2 weeks in a row, because you avoided calling them for 3 weeks, for example.  Each time you call them, you re-file the item for “1 month from today,” and it works great.

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