The biggest reason that small businesses fail is that the owner or owners give up and throw in the towel. Persistence doesn’t always pay off, but lack of persistence is a sure recipe for small business failure. There will be crises. Count on it.
Still, I have seen many small businesses plug along when they probably shouldn’t have. The reason? Their business model was flawed to begin with. There is no use in throwing good energy at a bad business model. The sad fact is that many small business owners have never taken a step back to see if their business model is viable. Looked at from the perspective I talked about in an earlier post, that entrepreneurs have a strong artistic/creative component, the dilemma becomes clear. Many small business owners have starving artist syndrome! Their profit margins are too low for the amount of time and resources they put into their work.
Don Debelak wrote an excellent book about business models called “Business Models Made Easy”. It’s the best book on business models for the small business owner that I have seen on the market, and I highly recommend it. One of the key points made in the book deals with margins. A business has a better chance at long term success if it has healthy margins! It’s common sense really, but you might be surprised at how many business owners don’t have a clear idea (OK, any idea) of what their margins are. Can a business succeed without high margins? Sure, but that requires an efficient operation with high volume sales. Most small businesses don’t have their act together enough to live on high volume. If the business is not capable of generating a good margin – it’s likely that the business will spin its wheels and burn lots of energy for little gain.
So, what constitutes a “high margin”? And what makes the difference between a good business model and a bad model? Put together a financial model of the business. Run a best case and a worse case scenario. What do you see? If the business can’t make an acceptable profit even in the best case scenario – well then – that’s not such a great model, is it? Try upping the margins in the model until that changes. Now you are on the road to a “high margin”. Oh, and don’t forget the worst case scenario. Let’s try to minimize the risk while we are at it, shall we. What can you do – up the margin, lower the expenses? How can you change the model?
It’s an art and that’s a good thing for us entrepreneur artists.
More on business modeling to come….