Why Are Entrepreneurs Reluctant to Ask for Help?


by A. Michael Weaver - Date: 2006-12-10 - Word Count: 941 Share This!

Each year, there are many businesses that close their doors unnecessarily because they simply did not seek help soon enough. The statistics are startling and yet consistent in good times and bad: 7 out of 10 new businesses in the United States will fail within the first year of operation and generally only a 10% chance of surviving five years. Clearly, the margin for error is fairly small. Experience has shown that there are several common mistakes that must be avoided and early trouble signs that must be taken seriously.

Many times entrepreneurs will get a good idea and figure that passion and energy will be enough for them to succeed. They do not take the time to properly investigate the market, talk to potential customers or know the nature of the competition. Enthusiasm alone is rarely enough to get a business successfully off the ground. Focus on some basic questions. How long will it be before the business reaches the breakeven point? How will this business be able to grow in the future? Without proper planning, the new business owners will find themselves flying by the seat of their pants day to day.

New business owners often emphasize sales quantity before they know their true costs. They immediately sell their products and services based on a lower price instead of finding the right market niche and promoting value to the customer. This may be better product quality or faster service at equal or even slightly higher prices. If possible, develop a unique marketing proposition that identifies the qualities differentiate your products and services from the competition. Then calculate your fixed and variable costs and ensure that there is enough of a profit margin that will allow the business to grow while rewarding you for the risk you are taking with your capital.

It is critical that entrepreneurs not underestimate the amount of financial resources that will be needed to effectively get through those first few months. Vendors will want to be paid promptly, but customers will expect to be extended credit. Develop a cash budget by week and adjust based on actual results. Build in systems that communicate accurate feedback on expense commitments and receivable collections. Do not expect to use the checkbook to manage the company's finances. By the time the balance turns negative, there will not be sufficient time to reduce spending, implement early payment discounts or find additional capital.

There must be an effective strategy to market the business. Beware of generic forms of advertising such as yellow pages or newspapers. Find the marketing consultant or advertising agency that will provide the professional support needed to develop a relevant marketing message that achieves your marketing goals. Insist that the agency or media source provide periodic reports on number of customer exposed to your message so that you can calculate the return on your advertising dollar investment. Test the effectiveness of each advertising campaign. If you are not getting increased sales results, change your message, change the media or change the advertising agency.

Implement internal financial management systems that provide you with feedback on key indicators on a daily, weekly and monthly basis. Do not count on your outside accountant providing the numbers next month for what is happening today. You need current information in order to take timely action should actual financial results start going south.

Be on the look out for the early trouble warning signs for typical businesses:

• Accounts Receivable - When the amount owed to you exceeds the revenue you are collecting monthly, you have effectively become a lending institution for your customers. There may be short term conditions that make this necessary, but generally your credit policy should clearly define your expectations regarding customer payment terms, late fees, finance charges and collection action.

• Gross Margin Trend - Gross margin is the amount remaining after variable costs of sales is subtracted from sales revenues. These are the dollars available to pay the fixed expenses and realize a profit for the month. It is important that the gross margin percentage of total sales revenue remains at budgeted levels or, preferably, improve each month. A downward trend in gross margin percentage is a red flag that either productivity or pricing is slipping.

• Fixed Expense Control - Fixed expenses (rent, utilities, management salaries, advertising, office supplies, computers, etc.) are controlled using a fiscal budget. When the total of these expenses exceed the monthly budget without advanced warning, control actions must be taken or profits will disappear.

• Payroll - If employee payroll checks are being run but there is not enough cash available in the bank. Cash management practices must be implemented.

• Accounts Payable - When payments to vendors are consistently overdue and the telephone does not stop ringing at the first of each month, it is only a matter of time before suppliers are only willing to deliver COD. Contact your key vendors and negotiate a new payment plan before your credit rating is penalized.

• Inventory Value - If the sales value of the finished product inventory exceeds the average monthly sales volume, there is room for improvement given today's business environment. Programs such as "Just in Time" inventory management have established new standards for capital in use.

The major reason most businesses fail is related to poor or unskilled management. Few people can be good at everything managing business demands. Stay alert to the presence of the warning signals. Be aware of what you don't know and complement your skills and knowledge with expertise from a board of directors, experienced business advisors or trained professional consultants. Don't wait until it's too late to get an honest, objective assessment of your business and help with what can be done to head it in the right direction.


Related Tags: entrepreneurialism, problem-solving, consulting

A. Michael Weaver founded Weaver Research & Consulting Group (http://www.weavergroup.org) in 1998 with the mission to conduct thorough research and develop sustainable solutions to client's problems. WRCG specializes in finding ways to change your organization potential into improved bottom line performance.

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