I have written about my experiences with many small business owners and many of them who are my family too. I have seen multiple business failures over time and I can say with certainty that a precursor to a business failing is when it stops growing.
Many business owners struggle with this situation when the business just refuses to pick up.
100% of small businesses I surveyed struggle to grow due to three key factors. 1: Not having a reliable set of early customers who provide steady revenue; 2: Not having a reliable second in command to run day to day operations and 3: Spending too much before the business becomes self-sustaining.
When I spoke to three owners who have successfully managed to scale their business and now run multiple businesses, they gave me the following insights on why many small businesses struggle to grow.
They didn’t have a mentor to open doors for them
This was a key factor for all three business owners I spoke to.
Each of them had a trustworthy mentor who initially helped in opening doors with good long term customers who were more forgiving.
A mentor is someone who knows the business owner for a long period of time and can vouch for the credibility and reliability of the business owner to a third party.
The mentor also wields some sort of authority so that prospective new customers take their references seriously.
This mentor can be an erstwhile employer, a professor, a family friend with friends in high places or even a close relative.
Using the mentor to open doors for the first few customers is one of the key steps to get initial revenues and money flowing in that provides stability to the business.
No amount of marketing or presentations can replace a trusted word of a mentor with a prospective customer.
Once you have the initial set of customers, use the income from these customers to reinvest in the business to build the next phase of growth.
Spending too much before earning a consistent income
Many business owners end up putting in a lot of capital into the business in areas that are not directly adding value to the customer before it starts generating revenue.
A classic case in point is marketing.
Many business owners have a marketing budget before the business becomes self-sustaining. They end up promoting their business through paid marketing channels in the hope of growing a customer base rapidly.
This causes the business to run out of money faster than it can generate income and the business ends up shutting down
The ideal manner to grow would be to first focus on a minimum number of customers needed to cover the costs of the business. Only then should the business owner focus on driving growth.
Once the income stream becomes steady, then focus on adding incremental expenses where each dollar spent results in at least a dollar earned.
They don’t rely on the old fashioned word of mouth
These days, most small businesses waste time, money and effort on social media in their early days to try and get new customers.
The old fashioned ‘word of mouth’ has incredible power in building a trusted circle of customers who can give you consistent cash flow.
Small business owners have to invest time in the early days to build a network of customers who know the business well and who know each other. The business owner will have to ensure that each of these customers get more value from the business than they expect.
According to the business owners I spoke to, customers acquired through word of mouth have a 2 times the retention rate than other customers and are 3 times more likely to remain favorable advocates over the long term.
No reliable second in command to take care of day to day operations
If the small business requires managing day to day operations, the business owner must have a reliable second in command to delegate responsibility to.
Hiring the right person is the single most important decision a small business owner will make during the initial days.
This will free up significant mental bandwidth for the business owner to focus on some of the strategic and important decisions like meeting customers, managing cash flow and building networks which need significant time investment.
Again, the most important part here is to make sure the second in command scores high on both capability and integrity and has a strong incentive to give his or her best effort to the business.
The small business owner should ideally spend more time in finding the right person before going live with the business so that they can learn together as the business develops.
Small Business owners don’t know how fast they should grow
Most business owners start a business because they are passionate about the niche in which their business is. However, their passion is not often backed by a basic business sense where they intuitively grasp growth, compounding and cash flows.
All 3 business owners I spoke to, in their early days, had to learn by failing to grow because they just did not know how much they should be growing. As a consequence, they did not know what to measure and what to track.
As a general rule, a small business should aim to grow revenues at least by 10% every year. For a detailed guide on benchmarks a small business should aspire for depending on the sector, you can read up further here.
Once the business owner knows a benchmark growth rate, he should look at all levers available to achieve that growth rate.
Not knowing the metrics that are critical to the business
Every business is different even if it operates in the same sector.
The business owner will have to identify some key metrics that will be used to track the performance of the business. These metrics will help the business owner decide what changes are to be made in the way the business is managed.
An example I want to share here is of a business owner friend who runs a factory that makes potato chips for a well known snacking brand.
He looks at a metric called “Cost per chip” to take any decision on investments or expenses being made in the business. If the expense or investment is expected to increase the cost per chip over time that decision is not taken.
He uses similar metrics on cost since that is the biggest lever to improve his profitability as he cannot increase prices as they are bound by long term contracts.
I would urge each business owner to define metrics that can make or break their business and track it rigorously and make adjustments accordingly.