Three Tips For New Business Survival, And Making ‘Healthy’ Choices Along The Way
As President of the Americas, Tony Ward leads Xero’s businesses in the United States and Canada.
In the postmortem on small businesses that didn’t make it, cash flow is overwhelmingly listed as the cause of death. But was the real problem cash flow, liquidity or capital, or was cash just the last problem — the most obvious, and the one that couldn’t be overcome in the painful descent toward the end of one more entrepreneur’s dream?
It’s not unlike what happens to 650,000-plus people each year who make heart disease the leading cause of death in America. Was the real issue a heart that ran out of steam, or is the answer a bit more complex — involving a raft of lifestyle and dietary choices, bad habits and omissions made along the way? Chicken or egg?
It’s a decent time to be asking, because history tells you that unless the traditional patterns and behaviors change, a lot of brave individuals taking their shot at small-business ownership are going to be asking where, how and why it all went wrong by this time next year, or sooner. The Bureau of Labor Statistics and conventional wisdom say that about one-fifth of small businesses don’t survive to their first birthday. And roughly 45%-50% will fail within five years, based on BLS data from the past couple decades.
Against that track record comes an astounding volume of new business applications this year in the U.S. — almost 488,000 in April alone, and a total of 1.36 million in the first quarter. That compares with about 840,000 applications in the first quarter of 2020, according to U.S. government census data.
Elementary math says those first-quarter 2021 numbers represent more than a quarter million small-business postmortems waiting to be written before this time next year. Experience says that the same cash flow issues that end over a quarter of small businesses will continue to be a leading cause of failure. It doesn’t have to be that way.
But defying gravity, in this case, will require this next generation of owners understanding that cash will be their last problem if they fail to make healthy business choices while there is still time.
Our company’s survey of 800 millennial small-business owners in Canada (and it is not a large leap of faith to extrapolate this to other relatively young entrepreneurs) found that they believe themselves to be considerably more financially savvy than they really are. More than 60% considered themselves financially literate, but 66% couldn’t earn a “C” grade when presented with a series of true/false financial questions. Gen X managed a “C.” Baby boomers earned a “B-,” striking a blow for age and experience. As the world orients to the new realities of post-pandemic competition and consumer behaviors, that’s a troubling gap in financial decision-making.
And since small businesses represent over 99% of all businesses in the United States, it’s natural that banks, local governments and chambers of commerce, software providers and financial advisors are all mobilizing to meet these new owners “where they are” and protect the impact small businesses can deliver in the post-pandemic recovery.
The nice aspect of starting out today is that a one-person enterprise can look large — and can compete at scale — using access to the cloud, apps and a few well-selected advisors to transcend the competitive advantages offered by traditional definitions of market presence. So what are the choices that need to be made by new businesses and owners?
First, understand that there are no unserved markets.
Every segment will be populated by two kinds of people: competitors and customers. You have to understand both, intimately. And you have to be prepared to do at least one thing much better than your rivals, while surrounding your offering with amazing service.
Second, being digitally native is valuable, but the winners will think and act broadly, understanding both technical possibilities and limitations.
Millennials don’t have to be persuaded about the value of software and apps. In my experience, they want to buy bundles, and mobile capability is not optional. They need to be diligent and open to finding the right technologies for their business.
And finally, rational confidence is different from bravado.
Winging it, going it alone or walking into the world of ownership wearing blinders is a self-limiting strategy. Surround yourself with the right advisors — starting with a trusted bookkeeper or accountant who will help set up a viable plan and anticipate financial issues on your behalf. As an example, in our survey of Canadian millennials, about a quarter of respondents weren’t aware they’d have to report all the pandemic-related financial aid they received on their taxes.
The number of new business applications is either impressive, or scary. Making a small business work has never been easy, but it’s quite possible that the uncertainties of a marketplace re-ordered by a pandemic mean it’s never been this hard. Give yourself a fighting chance.
Go confidently with what you know, be willing to acknowledge what you don’t know and fill the gaps by making choices that can prevent cash or anything else from becoming the problem that prevents you from living out your dream.