Where is your organization in its business cycle?
Are you beginning, operating or closing the business? If you’re operating it, is it growing or shrinking?
Your challenge is to recognize which section of the cycle you’re in and, most importantly, what to do about it.
The U.S. Bureau of Labor Statistics tracks the number of businesses started each year and how long they survive:
- Within the first two years of a startup, about one in five companies will no longer exist.
- Within three years, almost one in three will close.
- Almost four in 10 will be gone in four years.
- About half will disappear in six years.
Some companies close for good reasons. The owners achieved their purpose, for example. Or the business was sold.
But the trend indicates that companies in their early years are more prone to failure. Those at least five years old typically have experienced a recession or hard times. They’ve been able to navigate difficulties, and have the skills and experience to weather future business and financial storms.
What’s needed for success
As a business owner, you must have one or both of these traits to be successful:
- You’re excited about being in business. You don’t care about the product or service as much as you do about being in the “game” of business.
- You’re passionate about the company or genuinely love the product or service. Ideally, you’re excited about both.
Business owners must always be learning. Formal education doesn’t include making payroll, servicing debt, closing customer sales, marketing the business or dealing with troubled employees. Formal education is theoretical. On-the-job practical experience is a necessity.
Owners create a vision for the organization and make long- and short-term plans. The most straightforward business plan answers these questions: Where are you? Where do you want to be? How do you get there?
Business strategists make the process too complicated. Remember the image of a sailor in the crow’s nest of an old sailing ship? He was responsible for identifying whaling opportunities, dangerous reefs or even, “land ahoy!” He looked for markers to understand the ship’s location, opportunities or dangers. His role was to help the ship stay on course.
You’re like that sailor, surveying the business environment. The traditional strengths, weaknesses, opportunities and threats analysis is helpful. The threats and weaknesses evaluations are most critical in the short term. They must be identified, understood and mitigated.
Knowing your strengths and opportunities is essential for long-term growth.
The importance of working capital
Also focus on working capital and profitable collected sales to ensure the continued success of the business.
I’m a professional speaker and consultant and meet many CEOs, CFOs and controllers across the country. And I’ve been surprised by how few understand working capital. Most describe it as “having enough cash available for operations.” That overlooks vital components which could force the business to close.
The correct definition is current assets minus current liabilities. It also includes knowing the implications of your company’s policies, creating procedures, and monitoring to ensure there’s enough cash available to operate.
Adequate working capital involves prudent customer terms, diligent collection of accounts, appropriate amounts of inventory and sufficient lines of credit from your financial institution, along with wise use of lines of credit, and reasonable credit terms and lines of credit from suppliers.
Your business still has to produce a product or service that meets the needs of customers at a price they are willing to pay while still making you profitable.
Starting a business and operating it at the beginning, without pressure, is easy. Staying in business is hard and takes significant effort.
You must focus on execution and delivery of the product or service to create satisfied customers. Remember this, and your business will stay on course as well.
