What are the risks of owning my own business? Although anything can happen to threaten the survival of a small business, most small businesses fail for one of a few common reasons. Some reasons why businesses fail include:

• Too much accumulation of debt

• Inadequate management

• Poor planning

• Unanticipated personal sacrifices

Let’s examine each risk in more detail.

What causes excessive debt accumulation? One reason many new businesses fail is that they accumulate too much debt early on. Most begin a new business by borrowing funds. Regardless of whether the loan comes from a bank, an outside investor, or a credit card company, if the new business does not generate revenue quickly enough to begin to pay back the loans, the burden of paying the debt balance plus additional interest as well as normal operating expenses can cause an owner to become further entrenched in a potentially unrecoverable situation. The situation might also tempt the owner to take out more loans to keep the business running. What’s worse is that some business owners borrow against their personal assets. This puts the owners at risk of not only losing their businesses but also potentially forcing them to file personal bankruptcy as well.

How does poor fiscal management lead to failure? Although entrepreneurs and small business owners are good at coming up with ideas, they may not be great at managing the books. The fact that so many businesses fail as a result of high levels of debt can be a sign of poor financial and business management. Financial statements and budgets need to be created honestly and adhered to each month, accounts receivable religiously collected, and accounts payable aggressively managed. Take Jodi Gallagher, for example. Jodi owns a business that designs and creates lingerie. In an effort to get her product into as many stores as possible, Jodi was lenient on the collection terms of her accounts receivable. Rather than insisting on immediate payment, she extended stores credit, and, as a result, it took her months to collect. Realizing that her mistake almost cost her business, Jodi no longer extends credit.24

What other types of improper management lead to failure? For some new owners, an early surge in sales proves to be overwhelming. This is what happened to many dot-com companies that went bust in the late 1990s. They did not plan for rapid growth and therefore did not have sufficient inventory to fulfill orders when they came in. They also did not take into consideration the subsequent impact this would have on dealers and retailers who were a part of their distribution channels. Similarly, unexpectedly high demands can lead to expanding the business too soon or moving into areas that are less profitable—both of which can cause the business to stray from its original course and set it up for failure.

Many business owners ignore the initial signs of business failure or attribute the failure to the wrong reasons. Good managers stay on top of all aspects of the business, remain objective, and make tough decisions when necessary.

How important is planning to a business’s success or failure? Large debt accumulation and poor business management happen after the business is established. One of the biggest reasons businesses fail is that there was no formal plan in place to begin with. The old adage “failing to plan is planning to fail” certainly applies to starting a business. Many budding business owners, in the excitement of starting something new, neglect to take the boring and difficult but necessary steps of building an effective business plan. A business plan is a formal document that states the goals of the business as well as the plan for reaching those goals.

As Figure 5.8 shows, a business plan includes the company’s mission statement, history, and the qualifications of the owners and management team and any resources they might have to contribute to the business. It includes a marketing plan, an operational plan, a financial plan, and a risk analysis. A business plan also identifies the competition and highlights opportunities for success. (You will find more information about creating successful business plans in Mini Chapter 2.)

Figure 5.8

A Business Plan Outlines a Company’s Goals and Strategies

Neglecting to consider any of these factors can doom a business from the start. Writing a business plan forces you to think through some of the more difficult aspects of the business up front. Poor planning can lead to unnecessary spending. Equally, a well-written and well-thought-out business plan can lead to greater financing options as lenders are more likely to invest in a business that has a solid plan. Success is a lot more difficult without adequate funding.

New businesses also may fail when their new owners do not adequately anticipate the many personal sacrifices—financial, time, and otherwise—they are forced to make. For example, the cost of health insurance and retirement accounts for the owner and employees falls solely on the shoulders of the new business owner. For businesses with more than 50 employees, providing health care is mandated by the government. For smaller businesses, however, to keep the business running, sometimes the expense of health insurance and long-term retirement funding for the owner gets postponed. Additionally, the amount of time and effort owners must invest in the business, as well as the necessity to take on multiple responsibilities, makes running your own business not for the faint of heart.

Where do small business owners go for advice? Most new business owners are just that—new. Because they haven’t experienced much of what they will encounter, knowing when and where to go for help, a second opinion, or just advice can make all the difference. There are several sources of help and advice that a small business owner can turn to (see Figure 5.9):

Figure 5.9

Small Business Support Websites

• The Small Business Administration. In addition to financial assistance the SBA offers help with the legalities needed to start and operate a business as well as education and training, disaster assistance, and counseling for small business owners. The SBA holds events in major cities in all states, such as workshops in financial analysis, creating a business plan, and launching a business. It also offers free online courses and coordinates links to academic institutions that offer private online training. The SBA also acts as an advocate for small business owners to national and state policymakers. It works to reduce regulatory requirements and maximize benefits that small businesses receive from the government.

• SCORE. The nearly 11,000 volunteers who make up the SBA’s Service Corps of Retired Executives (SCORE) offer workshops and counseling to small businesses at no cost. The volunteers are currently working in or have been in the field and can therefore provide advice to new or existing small business owners. They review business plans, help with tax planning, and offer new ideas and fresh insights. Some SCORE success stories include Vermont Teddy Bear, Vera Bradley Designs, and Jelly Belly Candy.

• Other mentoring sources. SCORE is not the only resource new business owners can turn to for mentors. Industry-related conferences or seminars often present new business owners with opportunities to find others who can serve as sounding boards and guides. In addition, other organizations, such as the Entrepreneurs Organization (EO), connect business owners with experts in their industry for individual mentoring. Although the EO is for those who are currently in a viable operation (its requirements are that you must be a founder, cofounder, owner, or controlling shareholder of a business with a minimum of $1 million in annual gross sales and younger than 50 years old), such mentoring services can nonetheless be helpful to small business owners who have already launched their businesses.

What kind of training is appropriate for small business owners? Before jumping into any endeavor, it is always good to have some experience or training. Although many entrepreneurs have advanced degrees in business, that level of formal education is often not necessary. If you are currently in college, look for internship opportunities in your industry of interest. Both large and small companies use interns.

Most community colleges offer business classes for credit or noncredit community education classes that are taught by industry professionals. In addition to formal classroom training, you can also obtain hands-on experience by interning or working part-time for a company in a related field; if no opportunities exist in a related field, working for any start-up company can give you experience that can help you run a small company.

Where can small business owners go for support services? One of the biggest overhead costs for many new businesses is the support services required to run the business. Business incubators are organizations that support start-up businesses by offering administrative services, technical support, business networking, sources of financing, and more that a group of start-up companies share. Business incubators can be either private organizations or public services. Over the past few decades, many cities, as well as developed and developing countries, have started public business incubators, often in conjunction with universities and research institutions, to promote new business development. For example, the National Science Foundation has created Innovation Corps (I-Corps)—a $5 million incubator for student entrepreneurs—and Rensselaer Polytechnic Institute runs one of the oldest incubator programs in the country.

The primary goal of a business incubator is to produce successful businesses that are able to operate independently and become financially viable in the early years when they are most vulnerable to failure. Incubators also create a synergistic environment where companies can act as peer-to-peer mentors, ­sharing both ­successes and failures. Incubators also lend legitimacy to a beginning company as well as a more professional atmosphere than someone’s home office. Eventually, participants must leave the incubator, but beginning in an incubation program can increase the success rate of many start-ups.

What other options exist for small business advice and assistance? As noted previously, starting up a small business requires a business owner to fulfill many roles. Many owners quickly realize that their strengths lie in only one or a few of these roles and therefore seek assistance from other people. One option is to team up with partners who offer the company strengths that the new owner does not possess. The partners in turn share the business’s profits and liabilities. Forming an advisory board is another option. An advisory board is a group of individuals who offer guidance to the new business owner. It is similar to a board of directors in a publicly held company except it generally does not have the authority to make decisions.

Does my business location make a difference in the type of help I can get? In most cases, new business owners look for a location that is suitable for their business, has good traffic flow, is safe, and so on. However, in an effort to build up and even resuscitate communities throughout the United States, federal and state governments have established enterprise zones, geographic areas targeted for economic revitalizing, based on various criteria, such as their population, poverty rates, and amount of economic stress they are experiencing. Businesses receive generous tax benefits for locating and hiring in these enterprise zones. Almost every state has some form of enterprise zone program. In addition, the federal government has enterprise communities and empowerment zones across the United States. The economic benefits companies receive when they locate in an enterprise zone often outweigh the risk of locating in a distressed area.