Last week I was asked the question: Why do businesses fail? There are many answers that professional advisors like me can give you that will generally answer the question. Responses such as the under capitalization – or not having enough cash, poor management skills – making bad decisions or underestimating the completion and/or ineffective marketing are all very good reasons as to why businesses fail. However I would sum up all those responses by saying that businesses fail because they don’t manage their expectations properly.
Here’s what I mean. Many inexperienced business owners don’t expect a lot of problems so they don’t plan for them. Novice entrepreneurs innocently believe that when they are open for business the crowds will come running. They don’t really expect to need a marketing plan or for things to fail or go awry so they don’t create a contingency plan (or a plan at all in most cases). Most business owners are quite optimistic about their business idea or concept so they naively trust that things will go as THEY imagine. Most seasoned business men and women know this is not true. While optimism is most certainly necessary, there’s a healthy bit of practically that is needed as well.
Because there is so much to learn for a new entrepreneur, it’s easy to get overwhelmed, miss critical strategic decision-making information or simply run out of research time to investigate how to proportion time or dollars wisely. And to add insult to injury, the new entrepreneur doesn’t really know what he/she doesn’t know. Often it can be very difficult for a novel entrepreneur to grasp the vast amounts of information and critical thinking and planning skills needed to create success in the business. In addition, much of the learning has to be done congruently– while running the business– which is difficult at best.
It is possible, however, to beat the odds of business failure–simply by considering the following 5 planning strategies:
- Plan to have a consortium of advisors that have business experience and that are willing to share their advice and knowledge with you. And then use this group of advisors regularly –getting advice from them about your plans.
- Plan for the worse possible outcome, but expect the best. Make sure your financial forecasts are conservative, meaning extremely modest.
- Plan your sales and your expenses. Forecasting a loss or break even is ok and shows that your planning is probably more realistic than not. Don’t expect the business to be able to support you right out of the gate; have other funds available to pay your personal bills.
- Plan your ramp time to take longer than you initially intended. Plan to grow slowly so your costs can keep pace. In business, every dollar you earn cost you something either in marketing, people costs, manufacturing costs, etc. So if you plan exponential growth –it will cost you exponentially, so be conservative and operate within a budget.
- And finally, plan to continuously change the plan. Your strategy has to be flexible enough to keep up with a consistently changing market, including economic highs and lows and consumer demand. If you don’t adjust your plans quickly you could lose your shirt at the cat’s meow so you must be willing to throw out ideas and plans that aren’t working without being emotionally attached to being right.
As an entrepreneur, you have to know that things are not always going to go according to plan or imagination — expect the wheels to fall off and prepare for it. Your business will have a much better chance at success if you do.