Why Do Businesses Succeed?

Being successful as a business owner requires more than coming up with a brilliant idea and working hard. You need to learn how to manage and grow your business. In the process, you’ll face numerous challenges, and your ability to meet them will be a major factor in your success (or failure).“D&B—The Challenges of Managing a Small Business,” http://www.dnbexpress.ca/ChallengesSmallBusiness.html (accessed October 30, 2008). To give yourself a fighting chance in making a success of your business, you should do the following:

• Know your business. It seems obvious, but it’s worth mentioning: successful businesspeople know what they’re doing. They’re knowledgeable about the industry in which they operate (both as it stands today and where it’s headed), and they know who their competitors are. They know how to attract customers and who the best suppliers and distributors are, and they understand the impact of technology on their business.
• Know the basics of business management. You might be able to start a business on the basis of a great idea, but to manage it you need to understand the functional areas of business—accounting, finance, management, marketing, and production. You need to be a salesperson, as well as a decision maker and a planner.
• Have the proper attitude. When you own a business, you are the business. If you’re going to devote the time and energy needed to transform an idea into a successful venture, you need to have a passion for your work. You should believe in what you’re doing and make a strong personal commitment to your business.
• Get adequate funding. It takes a lot of money to start a business and guide it through the start-up phase (which can last for over a year). You can have the most brilliant idea in the world, the best marketing approach, and a talented management team, yet if you run out of cash, your career as a business owner could be brief. Plan for the long term and work with lenders and investors to ensure that you’ll have sufficient funds to get open, stay open during the start-up phase, and, ultimately, expand.
• Manage your money effectively. You’ll be under constant pressure to come up with the money to meet payroll and pay your other bills. That’s why you need to keep an eye on cash flow—money coming in and money going out. You need to control costs and collect money that’s owed you, and, generally, you need to know how to gather the financial information that you require to run your business.
• Manage your time efficiently. A new business owner can expect to work sixty hours a week. If you want to grow a business and have some type of nonwork life at the same time, you’ll have to give up some control—to let others take over some of the work. Thus, you must develop time-management skills and learn how to delegate responsibility.
• Know how to manage people. Hiring, keeping, and managing good people are crucial to business success. As your business grows, you’ll depend more on your employees. You need to develop a positive working relationship with them, train them properly, and motivate them to provide quality goods or services.
• Satisfy your customers. You might attract customers through impressive advertising campaigns, but you’ll keep them only by providing quality goods or services. Commit yourself to satisfying—or even exceeding—customer needs.
• Know how to compete. Find your niche in the marketplace, keep an eye on your competitors, and be prepared to react to changes in the marketplace. The history of business (and much of life) can be summed up in three words: “Adapt or perish.”

Why Do Businesses Fail?

If you’ve paid attention to the occupancy of shopping malls over a few years, you’ve noticed that retailers come and go with surprising frequency. The same thing happens with restaurants—indeed, with all kinds of businesses. By definition, starting a business—small or large—is risky, and though many businesses succeed, a large proportion of them don’t. One-third of small businesses that have employees go out of business within the first two years. Some 55 percent never celebrate a fourth anniversary.Amy E. Knaup, “Survival and Longevity in the Business Employment Dynamics Data,” Monthly Labor Review (May 2005): 50–56, http://www.bls.gov/opub/mlr/2005/05/ressum.pdf (accessed October 20, 2008).

Businesses fail for any number of reasons, but many experts agree that the vast majority of failures result from some combination of the following problems:

• Bad business idea. Like any idea, a business idea can be flawed, either in the conception or in the execution. If you tried selling snowblowers in Hawaii, you could count on little competition, but you’d still be doomed to failure.
• Cash problems. Too many new businesses are underfunded. The owner borrows enough money to set up the business but doesn’t have enough extra cash to operate during the start-up phase, when very little money is coming in but a lot is going out.
• Managerial inexperience or incompetence. Many new business owners have no experience in running a business; many have limited management skills. Maybe an owner knows how to make or market a product but doesn’t know how to manage people. Maybe an owner can’t attract and keep talented employees. Maybe an owner has poor leadership skills and isn’t willing to plan ahead.
• Lack of customer focus. A major advantage of a small business is the ability to provide special attention to customers. But some small businesses fail to seize this advantage. Perhaps the owner doesn’t anticipate customers’ needs or keep up with changing markets or the customer-focused practices of competitors.
• Inability to handle growth. You’d think that a sales increase would be a good thing. Often it is, of course, but sometimes it can be a major problem. When a company grows, the owner’s role changes. He or she needs to delegate work to others and build a business structure that can handle the increase in volume. Some owners don’t make the transition and find themselves overwhelmed. Things don’t get done, customers become unhappy, and expansion actually damages the company.

Help from the SBA

The Small Business Administration offers an array of programs to help current and prospective small business owners. Services include assistance in developing a business plan, starting a business, obtaining financing, and managing an organization.U.S. Small Business Administration, “Expand Your Business with Programs and Services,” Services, http://www.sba.gov/services/index.html (accessed October 20, 2008).

Through various programs, for example, the SBA is responsible for seeing that small business owners get more than $60 billion a year in financing from lenders and investors. Each year, the SBA 7(a) Loan Guarantee Program helps some forty-three thousand small businesspeople receive loans from private lenders. As you can see from Figure 5.10 "SBA Loan Guarantees, 1976–2004", the amount of money guaranteed by the program has risen considerably in the last thirty years.See Norman M. Scarborough and Thomas W. Zimmerman, Effective Small Business Management, 9th ed. (Upper Saddle River, NJ: Pearson Prentice Hall, 2006), 485–87; U.S. Small Business Administration, “Basic 7(a) Loan Program,” Services, http://www.sba.gov/services/financialassistance/sbaloantopics/7a/index.html (accessed October 20, 2008).

Figure 5.10 SBA Loan Guarantees, 1976–2004

The SBA also offers management and technical-services training. This assistance is available through a number of channels, including the SBA’s extensive Web site, online courses, and training programs. A full array of individualized services is also available. The Small Business Development Center (SBDC), a program of the SBASBA program in which centers housed at colleges and other locations provide free training and technical information to current and prospective small business owners., assists current and prospective small business owners with business problems and provides free training and technical information on all aspects of small business management. These services are available at approximately one thousand locations around the country, many housed at colleges and universities.U.S. Small Business Administration, “Office of Small Business Development Centers: Entrepreneurial Development,” Services, http://www.sba.gov/aboutsba/sbaprograms/sbdc/index.html (accessed October 20, 2008).

If you need individualized advice from experienced executives, you can get it through the Service Corps of Retired Executives (SCORE)SBA program in which a businessperson needing advice is matched with a member of a team of retired executives working as volunteers.. Under the SCORE program, a businessperson needing advice is matched with someone on a team of retired executives who work as volunteers. Together, the SBDC and SCORE help more than nine hundred thousand small businesspersons every year.U.S. Small Business Administration, SCORE—Counselors to America’s Small Businesses, http://www.score.org/index.html (accessed October 20, 2008).