Are Hidden Flaws In Your Business Preventing Your Success?
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Are Hidden Flaws In Your Business Preventing Your Success?
Ah, the joys of self employment...Good pay, flexible hours, excellent benefits, a wise and business savvy boss...And profitability, lots of profitability!
By: Caroline Jordan
Ah, the joys of self employment...Good pay, flexible hours, excellent benefits, a wise and business savvy boss...And profitability, lots of profitability!
By: Caroline Jordan
If you're self employed, chances are your own company is missing some of the features that you might consider to be ideal. It's a good thing being a business owner can have other benefits that are not as quantifiable. Things like satisfaction, loving what you do, not dancing to someone else's tune and charting your own course. But no matter how satisfying self employment is, the truth of the matter is this. If your business is to be sustainable, it has to sustain you financially in a way that makes you feel all the trials and tribulations of business ownership are worth the trip.
For one of my consulting clients, that trip has gradually become less and less sustainable and sustaining. They grew tired of the constant battle, the struggle to create enough cash flow to make payroll every week, and the toll the lack of cash was taking on their own lives. They made the difficult decision to sell their business and go back to work for someone else. In the end, the business did not work in one very important way. Their personal financial needs were not being met. For them, that was an insurmountable challenge.
When I speak of my clients' difficulties involving the constant struggle to make payroll and have enough left over to pay themselves, you may think the underlying problem is cash flow. But poor cash flow is only a symptom. The underlying problem is generally a business model that is not well thought out or well executed.
Before you get hung up on the phrase "business model", let me tell you what it means in real world small business terms. Your business model is basically what you do and how you get paid to do it. For an example, let's look at eBay. eBay's basic model is that it makes money by serving as a go between bringing buyers and sellers together. In exchange for providing the meeting ground and facilitating the sale, eBay receives fees. It isn't a complicated business model at its core, the difficulty is in executing the model in a way that satisfies customers and makes a profit for eBay at the same time. If the customers are unhappy, the model fails. If eBay can't operate at a profit, the model fails.
The second half of that equation is where my clients ran into problems. They provide a valuable service to a growing market but providing the service carries a high payroll and a high rate of liability and workers compensation insurances. For every dollar in sales, they pay out about 65 cents in payroll and insurance. That leaves 35 cents of every dollar for rent, utilities, telephone, marketing, advertising, etc. Trying to wring out enough money for the owners to get paid a living wage was usually impossible.
The owners were able to keep their heads firmly buried in the sand for only so long. We sat down one day and had a very in depth conversation about what the business could potentially produce for income for the owners in the short and long term. We weighed all the benefits, the costs, and the risks. The bottom line was that the business could not realistically support the owners in a way that would allow them to support their families in even a modest way.
Normally, this type of a hard look at a business reveals any number of opportunities for improving the business. In this case, it simply was not possible to make the changes necessary to make things work better for all involved. Let's explore why...
My client's were first time business owners. They are both professionals with years of experience in their own fields who both found themselves laid off by their respective companies. They knew each other through church and had been friends for some time. Working with agencies set in place to help them find new work, they were introduced to a program set up to help displaced workers start their own businesses. The program provided advice, resources, and structure for new business owners.
The friends decided to explore opening a business as partners. They began exploring different businesses and were drawn to franchising because of the remarkably high percentage of success for franchise outfits. Their interest in franchises led them to investigate a local operation that was selling franchises. The franchiser was new to the franchising business and had sold only one franchise to an employee so the model was largely untested.
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For one of my consulting clients, that trip has gradually become less and less sustainable and sustaining. They grew tired of the constant battle, the struggle to create enough cash flow to make payroll every week, and the toll the lack of cash was taking on their own lives. They made the difficult decision to sell their business and go back to work for someone else. In the end, the business did not work in one very important way. Their personal financial needs were not being met. For them, that was an insurmountable challenge.
When I speak of my clients' difficulties involving the constant struggle to make payroll and have enough left over to pay themselves, you may think the underlying problem is cash flow. But poor cash flow is only a symptom. The underlying problem is generally a business model that is not well thought out or well executed.
Before you get hung up on the phrase "business model", let me tell you what it means in real world small business terms. Your business model is basically what you do and how you get paid to do it. For an example, let's look at eBay. eBay's basic model is that it makes money by serving as a go between bringing buyers and sellers together. In exchange for providing the meeting ground and facilitating the sale, eBay receives fees. It isn't a complicated business model at its core, the difficulty is in executing the model in a way that satisfies customers and makes a profit for eBay at the same time. If the customers are unhappy, the model fails. If eBay can't operate at a profit, the model fails.
The second half of that equation is where my clients ran into problems. They provide a valuable service to a growing market but providing the service carries a high payroll and a high rate of liability and workers compensation insurances. For every dollar in sales, they pay out about 65 cents in payroll and insurance. That leaves 35 cents of every dollar for rent, utilities, telephone, marketing, advertising, etc. Trying to wring out enough money for the owners to get paid a living wage was usually impossible.
The owners were able to keep their heads firmly buried in the sand for only so long. We sat down one day and had a very in depth conversation about what the business could potentially produce for income for the owners in the short and long term. We weighed all the benefits, the costs, and the risks. The bottom line was that the business could not realistically support the owners in a way that would allow them to support their families in even a modest way.
Normally, this type of a hard look at a business reveals any number of opportunities for improving the business. In this case, it simply was not possible to make the changes necessary to make things work better for all involved. Let's explore why...
My client's were first time business owners. They are both professionals with years of experience in their own fields who both found themselves laid off by their respective companies. They knew each other through church and had been friends for some time. Working with agencies set in place to help them find new work, they were introduced to a program set up to help displaced workers start their own businesses. The program provided advice, resources, and structure for new business owners.
The friends decided to explore opening a business as partners. They began exploring different businesses and were drawn to franchising because of the remarkably high percentage of success for franchise outfits. Their interest in franchises led them to investigate a local operation that was selling franchises. The franchiser was new to the franchising business and had sold only one franchise to an employee so the model was largely untested.
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Caroline Jordan, MBA, is a veteran small business owner, accountant, consultant, trainer, and author. She is the owner of The Jordan Result, a company specializing in developing real world, practical resources to help small business owners improve cash flow and business operations. She is the author of Stop the Cash Flow Roller Coaster, I Want to Get Off! and Strength in Numbers. For more tips and articles to help your business succeed visit www.CashFlowRollerCoaster.com.
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