According to the Small Business Association (SBA), 75% of small businesses will not survive 5 years. The sad truth is that those that survive 5 years are likely not going to live to 10 years. Over 90% of small businesses fail within 10 years. Most NEVER show a consistent profit.
The SBA has not published exact reasons for these dire numbers so I have to rely on my experience with hundreds of small businesses that I have coached.
Here are my Top 7 Reasons why Small Businesses Do NOT Survive 5 years:
Lack of a business plan.
Lack of an ideal customer and marketing plan.
Lack of a financial plan / forecast.
Commingling personal and business expenses.
Running out of cash before the business takes off.
Setting prices too low.
Not having a system to track sales and expenses.
If you jump into starting your own business without taking the time to define your ideal customer and financial plan, you can likely waste a LOT of time and money and end of frustrated. By doing you research upfront, you can increase the chances that your business will be successful and achieve a higher return on your investment.
While crunching numbers may not seem as much fun as jumping into the business, it can save you time and money because you will know in advance if your business is "viable" based on your target customer.
Even if you don't need or want financing, doing a financial forecast will enable you to understand if and when you make a profit. You may find out that you need to make some drastic changes in order to STAY in business.
We are going to tackle one of the items above in this newsletter: The Financial Plan. This does not have to be complicated but it does require one to be thorough.
Your main goal is to understand start-up expenses, cost of goods sold, operating expenses, and expected sales over a period of time to determine if and when you have a profit or loss. While you may experience losses at the outset of your business, or in some slow months, but overall, your business should generate income and profit.
Our friends at Quickbooks have created a blank (no cost) worksheet that serves the purpose. It is available through Google SHEETS and I have provided a link below.
Begin by selecting the INCOME tab at the bottom of the sheet and enter the projected sales you expect. Try to be realistic: you won't have the same sales every single month. If your product is seasonal, your sales will fluctuate. In order for the financial plan to be of any help, it must be realistic. If you think you will make 50% of your annual income in the last 3 months of the year, let your spreadsheet reflect it.
Then select the EXPENSES tab at the bottom of the spreadsheet and enter your best guess at what costs you will experience and when. I realize that not all expenses happen each and every month. I pay for my website once a year so that expense happens in March and only March. Most of my other expenses, however, happen each and every month. Most I can predict.
Now go back to your Marketing Plan (you do have one, right?) and look at what you have planned to market for the year. Are you doing a big promotion for Christmas? A Black Friday sale? An Easter offer? Build those additional costs into the Budget (as best you can). Don't forget that trip to the convention in Vegas you want to attend and also the on-line seminar you want to buy! Those costs are rarely planned by the business owner and often come back to bite them in the butt.
Once the data entry is done, look at the final Tab called SUMMARY. Look at the lines and see where you may be in the RED and when you are in the BLACK. The RED months are ones where you are not covering your expenses with INCOME. Either reduce costs in that month or plan for sales boost. Maybe Christmas in July will get you over the numbers hump!
If you want some help, book a FREE strategy session with me.