By Charles Pittaway, Managing Director of Netcash
Doing business in 2012 is as challenging as ever, especially with the on-going recessionary influences in South Africa and abroad. Added to this, those setting out to start a new business are faced with the ever-rising cost of fuel as well as energy and raw materials and the tightening purse-strings of possible investors. If one were to review the reasons for a failed business, mistakes in marketing, finance and employment are hardly ever the primary factors. Many companies go under despite a solid product offering, skilled resources and detailed financial plans:
1. Agreeing the terms of engagement
A lot of businesses are started by two friends or colleagues who agree to split the equity and the decision making. Unfortunately, these deals have a history of falling apart, usually painfully and expensively. Sooner or later one partner begins to feel their own contribution is more valuable than the others. And if there is no mechanism for handling these differences, you’re in trouble. It’s a good idea to workout out a buy-sell agreement at the start if the business to govern what will happen in the event of a stalemate. If you can’t agree on the terms of a buyout while you’re still friends, how can you hope to do so when the relationship has soured?
2. Ignoring signs of trouble
Failures of judgment at the top have killed more small businesses than lack of money, talent and information combined. As entrepreneurs we’re often influenced by our sentiments to act in ways that actually put our businesses at risk. It’s absolutely essential to put aside regular time to step back, take a good cold look at what is going on and check whether it still adds up. When you do that, you need to trust the numbers: don’t let your attachment to the business blind you to warning signs of trouble.
3. No back-up plan
Of course you believe your business will succeed, or you wouldn’t be doing it. But failing to put a backup plan in place is suicidal. What if your product takes twice as long to develop as you thought, or customers buy only half as much? It often takes twice as much time or three times as much money to get going as you predict.
4. Excess cash
Oddly enough, too much money can be as much of a curse as too little. It can tempt you to hire people you don’t need, approach problems in ways that don’t focus on the value to your customer, take your eye off the market and weave dangerous inefficiencies into your business. Don’t ever get too comfortable.
I love working in flat organisations without lots of structure and hierarchy – it’s one of the reasons I started Netcash. But it would be naïve to think we could survive without some structures and channels for making decisions. When people start looking for direction, they need to know where it’s coming from.
6. Isolation at the top
Even if you keep an open door and employees know they can give you honest feedback, sometimes you need a trusted advisor outside the business. Your lawyer or accountant is not necessarily the right person – how many of them run their own businesses? Find a mentor or peer group of other entrepreneurs who have faced the same issues.
It’s tempting to fund a business with debt and keep 100% ownership – but very dangerous. Your bank is not your partner and it has no real stake in the success of your business – if things go wrong it’s got your house, your car and everything you own to fall back on. An equity partner, on the other hand, has got to pitch in to make the business work. As the saying goes, it’s better to have 50% of something than 100% of nothing.
8. Too many eggs in one basket
It’s great to have a bread-and-butter client, a big account that keeps the money rolling in. But if you lose that client, your entire business could be at risk. Keep your client base as diverse as possible – and if you can’t, make a plan for what you will do if you lose that account.
9. Competitive advantage
One successful product or service doesn’t make a business. If you really have found an attractive market, you can bet there are competitors looking to take a piece of it. Keep on researching, developing, introducing new products and new levels of service. Make the competition scramble to keep up, rather than digging yourself a static position and defending it with everything you’ve got.
10. Moving on
At some point in the life of almost every business, the original founder needs to step aside and let someone else manage it. The skills and attitudes needed for a successful start up are very different from those needed to manage a stable, mature company. If you stay on past your sell-by date, you run the risk of poisoning the business. Rather get out while you’re ahead and either enjoy the rewards of success, or move on to a new challenge. Then read this advice all over again.