you have a great idea you have a product or service for which the war
has been waiting you've scraped together enough cash to get your ID off the
ground you have a location you've done your advertising you just know this is
going to work and six months later you're out of business statistics from
the Small Business Administration indicate that about half of new
businesses fail in the first five years many new businesses fail and the reasons
are many and varied in this course we're going to address some of the primary
financial reasons that new businesses don't make it there are of course many
non-financial reasons that new businesses struggle poor marketing
poor location poor product quality we're going to limit this course to the
financial reasons for business failure if you get everything right but the
financial side of things your business is going to struggle of course if you
get the financial side of things right and drop the ball with the non financial
aspects of the new business you'll struggle as well with this course we'll
stick with the financial aspects of struggling new businesses because that's
what we know a little something about we have identified five common reasons that
new businesses that struggle seem to face of course this is not an exhaustive
list but these five reasons seem to consistently pop up when it comes to new
businesses that struggle those five reasons are insufficient capital poor
cash management poor record-keeping and controls improper product pricing and
uncontrolled growth before we get started let me first say that several of
these reasons for struggling are interrelated uncontrolled growth can
relate to poor cash management poor cash management can relate to poor
record-keeping and so on while these topics can be interrelated we will
address each one separately and then comment on the interrelationships when
they are apparent so let's get started
you
let's begin with the money needed to start a business too many new businesses
start their business without enough capital they just don't have enough
money in the bank to support them while their cash flows get up to speed it
turns out that the rent has to be paid the utilities have to be paid equipment
may need to be purchased or rented the employees have to be paid the inventory
has to be purchased all of your expenses have to be paid but you're waiting for
potential customers first to find you and then second to pay you there's often
a lag between when you get paid for providing a good or service and when you
have to pay your vendors and generally that lag is not in your favor
also when starting a business it takes time for your customers to find you and
for you to get your sales and marketing efforts up to full speed during that
time your expenses will continue to need to be paid it would be nice if all
customers would pay immediately it would also be nice if vendors would wait to be
paid until you are paid yeah that would be nice
many businesses are forced to close before they are able to find out if
their business model has a chance to demonstrate that its sound they just run
out of money when starting a business realize that it will take time for cash
inflows to start flowing but the cash outflow start flowing immediately make
sure that you have access to sufficient capital to allow your new business
venture enough time to succeed so how much cash is enough cash the answer to
that question can only come through a careful budgeting of cash inflows and
cash outflows it is critical that is part of your business plan you sit down
and carefully and realistically map out your expected cash inflows and outflows
for at least the first six months of your new business
this exercise will allow you to determine any forecasted cash shortage
and will allow you enough time to arrange for needed financing either from
partners or from creditors knowing well ahead of time that you will need cash
allowed you to make necessary arrangements for financing finding out
today that you need cash tomorrow puts you in an unnecessary bind we will
talk a little later in the course about the specifics of cash management but it
is critical upfront that you have an understanding that not having enough
money to get started can result in a good idea meeting and early demise
make sure you have sufficient capital or access to sufficient capital before you
open the doors to your new business again many new businesses with great
business ideas don't make it through the critical first few months a great ideas
not sufficient you need to ensure that you have access to enough capital to get
you through those first few months by the way if you plan on going to a bank
to ask for financing for your new business one of the first things they
will ask about is your cash forecast they will want to know what capital you
currently have available to you if you plan on asking friends and family to
invest if they are smart they will ask about your cash forecast to obtain
capital from others you need a cash forecast you might as well prepare one
for yourself the cash forecast will allow you to determine how much capital
you will need to get you through those critical first few months
you
we know you'll need sufficient capital get your new business through the
critical first few months let's assume you've made it through those first few
months you will still need to track your cash inflows and outflows to ensure that
you have sufficient cash to pay the bills that are surely coming whether you
are at the start of your business or well into the lifecycle of your business
managing cash is critical for the well-being of your business and cash
management does not happen by chance it is up to you to ensure that your cash is
managed we will do this by preparing a cash forecast or budget let's start our
discussion of cash management by distinguishing between two types of
costs fixed costs and variable costs fixed costs are exactly that they're
fixed budgeting for fixed costs is relatively straightforward the amount is
fixed at least over the short-term variable costs are costs that vary
relative to some activity or cost driver for a restaurant for example costs might
vary based on the number of customers first shop at the mall costs may vary
based on the number of hours that the shop is opened labor costs utility costs
and so forth now there can be a number of cost drivers or in other words costs
can vary for a number of reasons it just depends on how complicated you want to
get adding more drivers makes the arithmetic a little more complex but the
concept is still the same now step one in cash management is to identify all of
your fixed and all of your variable costs all of those costs it's easy to
forget an expense here or an expense there and before you know it your cash
forecasts are useless the cash forecast is only as good as the inputs next we'll
talk about variable costs
answering the question how many customers can we expect is the hard part
please don't gloss over this question your business will fail or succeed based
on the answer to this question how many customers can you realistically expect
many costs will vary based on anticipated customer demand answering
this big question is beyond the scope of this video but it would involve such
things as scoping out your competitors volume of business
assessing expected population growth in your area surveying potential customers
a whole host of things your forecast of sales will be critical in helping to
prepare your forecast of cash inflows and outflows we will do some sensitivity
analysis with these numbers to determine what might happen to our profits if more
or fewer customers show up now that we have a reliable forecast of our cost
driver at least as reliable as possible we can now compute our variable costs
please note that as our business grows and matures we will be able to determine
a much more reliable estimate on the number of customers we can expect
let's now turn our attention to the next area where new business owners tend to
drop the ball that is the area of poor record-keeping most new business owners
hate to worry about the record-keeping they would rather worry about customers
and sales and evasion and growth and everything other than record-keeping
proper record-keeping and internal controls are the blocking and tackling
of new businesses not very glamorous and not very interesting but it needs to be
done and it's safe to say that it needs to be done well you can liken proper
record-keeping and adequate internal controls to the keeping of statistics in
a football game the person tracking the statistics is not on the field playing
the game but those statistics are very helpful to those who are on the field
playing the game as we discussed in the previous video on cash management you
need to track your inflows and outflows of cash so that you can forecast future
cash flows all we're talking about here is developing a system of tracking your
inflows and outflows your obligations to others and others obligations to you it
can be as simple as that depending on the size of your business you can
purchase accounting software off-the-shelf there are a number of
great products that will do the job with minimal training but it is critical that
someone take responsibility for keeping the books why is it critical well three
reasons off the top of my head first more accurate information about your
business will assist you in running your business better you will need
information about cash inflows and outflows and about who you owe and who
owes you second if you ever need external financing bankers or investors
will insist on accurate financial information they will need that
information to assess business risk you need that same information for that same
reason and third taxes payroll taxes property taxes income taxes the list
goes on and on you need a system that tracks your tax obligations to ensure
that you pay the right amounts at the right times if the government has to
come in and do your taxes for you via an audit remember they don't work for you
they work for the taxing authorities they will not be looking out for your
best interest that will not be their job so get yourself a system for tracking
your inflows and outflows get a system that will keep track of who you owe and
who owes you get yourself a system that will provide you with the information
that you will need to better run your business
now about controls what are they controls our procedures that should be
in place to ensure that one the information that is being collected in
your accounting system is accurate and reliable thereby helping you to run your
business better and to to safeguard your assets and your records now what sort of
control should I have on information that I will collect you will need to
answer questions like how will you document that your cash outflows our
legitimate business expenses you better have proper documentation if
I'm in a business that has inventory for resale how will I know how much I have
on hand how do I know how many hours my employees have worked
you better have a system for tracking this information and of course you will
need a system that collects information about your cash inflows and your cash
outflows and you also need to know who you owe and who owes you we've talked
about that what else well you'll have information that's confidential about
employees pay rates Social Security numbers etc that all has to be
safeguarded what about customer lists what about pricing information as you
can imagine there's a lot of top-secret information relating to the inner
workings of your business that you don't want getting out you need to ensure that
you have systems that protect your information and ensures that the system
producing your information is accurate and reliable one last thing to mention
that is often taken for granted you will need to safeguard your cash
you will need procedures in place to make sure that cash and checks are
quickly and correctly deposited in the bank and that only authorized
expenditures are made this is no fun to talk about but we tend to assume that
those with whom we work are looking out for the best interests of the company
now that is often the case but is also often not the case many individuals are
looking out for them you need to make sure that those individuals are never
given the opportunity to be exposed to a situation where they might compromise
their integrity that is done by developing a set of controls within your
business to ensure that information is collected quickly and correctly and that
procedures are in place to ensure that assets especially cash are handled
properly now remember we said at the outset that this topic is the
no fun part of business no one likes to talk about paperwork if you don't talk
about and establish a system that collects accurate information in a
timely fashion and safeguard your assets you will have plenty time to talk about
that topic later when your business folds up a good system of record-keeping
and controls is what the scientists would call a necessary but not
sufficient condition a good information system will not ensure the success of
your business but a bad information system will
certainly contribute to your lack of success
you
so what can be so hard about pricing a product don't you just figure out what
your costs are and then add some sort of markup for profit oh that it were that
easy if your price is too high regardless of your cost someone in the
market will enter price you assuming that the quality of product or service
is similar in many cases you will be a price taker and you will have to manage
your costs so that you can earn a profit given a certain price is determined by
the market now let me say that again in most instances you don't price your
product to cover your cost instead you determine if given a certain market
price your cost structure is such that you can earn a profit the biggest
mistake new business owners make in product pricing is not considering and
covering all of their costs when entering a market now it is true that
when you are initially trying to penetrate a market you may be willing to
lose a little money to gain market share but that strategy is not sustainable
over time over the long term you must cover all of your costs all of your
costs
you
now to our last topic uncontrolled growth growth is awesome increased
market share is good sales trending upward is the dream and unmanaged growth
has killed a lot of companies growth must be carefully done or it could be
fatal to your business the reason being is that growth often requires cash and
cash is often the one thing that new businesses do not have a lot of in fact
a lot of new business owners when faced with the cash flow issues associated
with starting a new business they mistakenly think that the solution to
their cash flow problems is to grow faster not realizing that the fast
growth is causing the cash flow problem in the first place in other words they
hit the gas when they should hit the brake so how does growth cause cash flow
problems well think about it in a typical business that is selling a
product to a customer on credit that is the customer will pay and say 30 days
you as the business owner need to pay your rent pay your insurance pay your
employees pay for the inventory that sell that inventory and wait for 30 days
to collect the cash to grow faster means you need to buy and pay for more
inventory and then sell that inventory and wait for 30 days to collect the cash
the more inventory you have to buy the more inventory you have to pay for and
then still wait 30 days to collect the cash well let's just have our suppliers
wait longer to collect from us until we collect from our customers remember this
your suppliers are having the same cash flow issues that you are facing they
would like to receive their cash sooner rather than later
so what should you do next that depends on what you identify is your particular
small business problem are you having trouble with poor records are you
finding your financial reports to be uninformative or too often non-existent
and like it or not you need to learn something about accounting why are you
having trouble managing your cash flow are you always feeling cash squeezed
with not enough financial capital to invest in the assets information of
people that you need and you need to learn a little more about the field of
Finance maybe you feel like you are operating your business blind your
profitability seems low but you can't figure out why and you need some
exposure to some simple techniques of financial analysis finally remember that
there are lots of qualified business advisors out there sometimes it makes
some sense to spend a little money to meet with an experienced business
adviser describe your business your plans and your frustrations to the south
side advisor she or he can then help you sort through the weaknesses of your
business to identify the things that you need to work on first small businesses
are the source of creativity in an economy a small business is a precious
thing the embodiment of a person's ideas energies and ambitions I salute those of
you who have the entrepreneurial spirit and have started or thinking of starting
your own small business I wish you great joy and success
you