For years there has been a widely quoted, but apparently made-up, reference to a Bloomberg Publication study that said eight out of ten new businesses will fail within their first two years. The real figure may be closer to 50%, but the fact remains that most people who begin the process of starting a business will not see that proposed business thrive.
There are many things that can happen to thwart the best of intentions, and many of these are beyond the control of the entrepreneur. Previous MBA blogs have discussed the additional challenges that women entrepreneurs face, and certainly age, location, and the economy play huge roles. But in my nearly 30 years of working in the field of entrepreneurship, I have noticed five factors that seem to doom a significant portion of the ultimate failures.
- Lack of management and business experience
- Failure to conduct a basic “break-even” analysis
- Lack of customer validation
- Inadequate marketing effort
Each of these five challenges will be the subject for a blog of its own in the future, but let’s start by reviewing each at this time.
What could be better than turning your passion or hobby into a career? This is the dream of many entrepreneurs who relish the idea of expanding something they love, and are good at, into a venture that can earn a living. These creative and skilled people are often referred to as “artisan entrepreneurs,” or “technical founders.” Unfortunately few such people have managed to couple their creative abilities and innovative thinking with business acumen. So they may be wizards at writing code, copywriting, artistry, attention to detail, and adhering to quality standards of work. But they may be virtual strangers to pricing, hiring, legal compliance, accounting practices, sales, and negotiating deals.
GET OUT THE CALCULATOR
Closely related to this lack of business skills, is the failure to understand the complex relationship between cost of production, opportunity cost, pricing strategies, and the effect of competitor pricing. I have met with startups that have not taken the simple step of computing how much it would cost them to make the product or offer the service they are proposing. But a simple calculation could point out to them that their business idea may be mathematically impossible to profit from. A product that costs $10 to produce and is readily available on the market for $9 doesn’t allow for any profit margin, and in this case, even precludes the possibility of breaking even. This is why the process is called “break-even” analysis. Even if they could break even, it may still be impossible to actually make a profit.
BUILD IT AND THEY WILL COME…OR NOT
Just like some entrepreneurs don’t bother to do the math to see if they can break even, many don’t bother to do the research to see if a significant number of people are interested in buying the product or service. “Build it and they will come” was popularized by the 1989 film Field of Dreams, but as a business strategy it is more likely to result in “Field of Nightmares.”
SHOW ME THE MONEY
A common mistake in cash projections is to mistake “sales” with “cash-in-hand.” Many startups imagine that the flow of customers will begin within minutes of opening the business, and that those customers will be immediately throwing cash at the business owners. I have seen many entrepreneurs devote sufficient money to open the business but fail to budget for the period of time during which expenses continue to pile up faster than revenue. Some businesses send an invoice with delivery of the product and then allow thirty days for payment. That alone should indicate that there will be a considerable lag before cash receipts start matching ongoing expenses. And cash flow is a leading killer of new businesses.
ONCE PEOPLE HEAR ABOUT ME…
One of the reasons customers don’t show up on the first day of business is because they don’t know the business exists. Those same entrepreneurs that forgot to budget for ongoing expenses also often forget to budget for the type of extensive (and expensive) marketing campaign that can introduce a wide customer base to a business that didn’t even exist a few weeks ago. Do social media posts ever go viral and result in thousands of people hearing about a new venture? Yes. Does word of mouth ever get crazy and result in standing lines of people trying to spend money? Yes. But both are rare and neither can be relied on as a marketing strategy when the survival of the business depends on it.
Just one of these five weaknesses could seriously harm a business’s chance of success. Make it two or three and the odds are against survival. Unfortunately a surprising number of entrepreneurs manage to incorporate the “five-prong approach” to throwing in the towel. In future blogs we will revisit each of these, and more importantly, discuss how they can be overcome.
Since 2004, Bob Cohen has served as CEO of the Braintree Business Development Center, a non-profit regional entrepreneurship and business incubation program serving Mansfield and much of Northeast Ohio. Most of Bob’s work has been with high-tech, high-growth start-up businesses but he has an extensive background working with a variety of entrepreneurs. He earned a Ph.D. from Ohio University and an M.A. from The Ohio State University. He is a frequent presenter on topics related to business communication, planning, capital, and marketing.
Being a part of the Baby Boomer generation, I can remember often hearing that “Men have careers, women have jobs.” This always seemed unfair to me, because my investment in myself and my work is just as valuable as any investment that a man would make. No man I ever worked with was more dedicated, reliable, or willing to learn and grow at any company where I’ve been employed.
In 2005, after several years in various management positions with JCPenney, I decided to change directions in my career. To do this, I knew I had to come up with a plan. And I really wanted my plan to include ways for me to be more involved in the community and to give more of myself through helping those in need.
So, I retired from JCPenney. After a short retirement, I went to work for Empire Affiliates Credit Union to help keep myself busy while working on my new plan. Very shortly after going to work for Empire, we merged with the Toledo Area Community Credit Union, and I accepted a position in the Human Resources department that would also include working in our Education department. In this new position, I quickly learned that sharing information with others and helping them improve was very fulfilling. I realized my plan was starting to come to life.
Through various mergers and acquisitions, Empire eventually became Directions Credit Union. Once we became Directions, the Board of Directors made the decision to make financial literacy education a part of our strategic plan. The goal was to have Directions Credit Union become the number one place people in the community came to for basic, everyday financial education. At this point, I accepted the position of Community Outreach Education Coordinator. My plan had now become a reality. I had a new career that I was going to be able to mold and create that would allow both the Credit Union and I to give back and get involved throughout the community.
I believe that the greatest investment that any of us can make is the investment in our communities. To be a part of the growth and development of the space we occupy with our neighbors, lending ourselves to the things that make our community stronger. My new position with Directions enabled both the Credit Union and I to get out into the community to help in many fascinating ways.
The truth is that a community that is smarter financially is a stronger community. My role as Community Outreach Education Coordinator was created to develop and present programs that give participants an understanding of how to make better financial choices. So, when I took on this new role, I began developing workshops and programs that covered topics including budgeting, saving, credit, understanding checking, money scams, and identity theft. Today we have over seventy five programs, with new topics such as work ethic, customer service, financial abuse of the elderly, along with updated versions of our original presentations.
In Mansfield and the surrounding area, we interact with over 5000 youth and adults annually, making an investment in them that they can carry into the future. When a child remembers a lesson about savings, or a senior citizen makes a choice that protects them from a scam, or an offender at one of our local prisons makes better financial decisions because of something they learned at one of my workshops, I know my time has been well invested.
Out of all the programs and workshops I’ve completed over the years, a couple stand out that I am most proud of because of the potential positive impact they have had on our community. For six years now, I have done a quarterly 6 week Money Management course at the Richland Correctional Institution as part of their Reintegration program. This program helps encourage offenders to make better financial decisions as they move forward in their lives. And, for eight years now we have held Reality Store workshops in many of the area Middle Schools. This program brings together many volunteers from the business community to help 8th grade students gain an understanding of income, budgeting, credit, and how to manage their life around their finances.
In addition to all of the presentations and workshops I’ve completed over the years, my role at Directions has allowed me to become involved throughout the community in a variety of organizations. I am on the RCDG Leadership Team. I provide leadership to the Be Focal Buy Local group, which is a sector of the RCDG. I am the Chairperson of the Area 10 Workforce Development Board of Richland and Crawford Counties. And, I Chair the Advisory Board of Catholic Charities. Not only have I been able to serve in these positions, but I have encouraged and gained the participation of many business leaders throughout the area in these groups.
My plan that started many years ago has played out well for both myself and those that I’ve been able to help throughout our community. I have been able to give the gift of my time and knowledge to help many people. Along the way, I have also invested a lot of time in myself to learn and become an expert in the topics of my workshops, and how to make the various organizations I’m involved with function better. I have learned to share my knowledge effectively, and to find new ways to connect with people who might need my help. I have learned to connect with others who are not necessarily like me, who may have different values, who have had different life experiences, or who may approach life differently. I’ve learned that these differences do not make these people wrong, it just makes them different. I’ve learned that the biggest investment I can make in myself is to embrace these differences and to accept any and all that I may be able to help through all that my job at Directions allows.
This has been a fascinating journey, and I look forward to see what the future holds.
Community Outreach Education Manager, Directions Credit Union
Jenni, a native Mansfielder, is a graduate of Mansfield Senior High and a former JCPenney Manager who upon retirement discovered that she loved to work. When Directions Credit Union offered the opportunity to work with the community she discovered that it was her dream job. As Community Outreach Education Manager for Directions Credit Union, Jenni and her staff have the opportunity to share valuable financial information in the community. Her job allows her to be involved in a number of ways. Her departments’ financial literacy programs enable interaction with over 10,000 adults and youth annually. These programs cover a wide range of venues including, public and private schools, colleges, churches, shelters, prisons, senior centers, libraries and many more.