Early last week, I was invited by one of our other team members to have lunch with a husband and wife team who own an exciting small business. The couple literally started their business in their garage, and now with around five employees, their business is perched on the edge of significant potential growth. Although the primary purpose of the lunch was to discuss specific aspects of their risk management and accounting programs, my favorite part of the meeting was the chance to hear them share their vision and hopes for the business. Entrepreneurs tend to be optimistic by nature, and it is rare to find one that doesn’t get excited talking about the future that they envision for the company. Unfortunately, while that optimism can serve as a crucial motivator to drive those entrepreneurs toward success, it also often leads to them overlooking potential hazards and risks that they will face. Even though most business owners are well aware of how many new businesses struggle or fail, they still don’t like to think about the potential of it happening to them. While we don’t want anyone to focus just on the negative, one of the most critical aspects of building a business is to have a realistic plan that addresses the struggles and hurdles that any business is likely to face. Sadly, it is very common to see business owners make mistakes that haunt them for years to come, simply because they lacked the proper perspective. In preparing clients to avoid that mistake, there are five questions that we find helpful to discuss with them. Most business owners struggle to truly answer all five of these questions, but the more time that they spend considering them, the better prepared they will be make effective decisions.
What will the business have to accomplish for me to consider it a success?
Being able to envision an ideal future is a great first step for developing a strategic plan. However, even as that vision gives you a goal for which to shoot, the vast majority of businesses won’t be able to realize every aspect of that vision. The hard part comes when a business owner is faced with choosing between parts of their dreams for the business. Is short-term financial success or legacy more important? Would you rather make your employees or your customers happy? Do you want your company to be regarded as the best in its industry, or just make the highest margins possible while meeting expectations? Do you want to build your company as big as possible, or keep your work schedule and stress under control? Nobody likes to compromise on their dreams, but if you don’t decide ahead of time what is most important, you could realize too late that you missed your chance to achieve it. It is not uncommon to hear business owners say that even their businesses are profitable and appear to everyone else to be a success, that they find themselves unsatisfied and wishing that they had taken the opportunity earlier to build it into something with lasting impact. The earlier that you realize what that impact should be, the better chance that you will have of achieving it.
What is the realistic potential of my business?
We’ve probably all been told at one point in our lives “to reach for the stars,” but that can be deadly advice for a business owner. While there is nothing wrong with dreaming big and working hard to strive for that dream, sometimes we commit so much to an unrealistic dream, that we miss the chance for achievable success. It is difficult to be objective about our own organizations, because that would in turn require us to be objective about ourselves. To help overcome that, do research on similar organizations and seek out benchmarks that tell you how your competitors are doing. Seek unbiased feedback from your customers and employees and provide an opportunity for them to provide honest input. Spend time identifying weaknesses in your organization and potential threats to your success. Every business owner is faced with making decisions on where to commit resources and how much risk to take. Business owners who have unrealistic expectations of their potential tend to make bad decisions in those cases, and those bad decisions lead to the failure of many companies. This doesn’t mean that we have to give up dreaming, just that we have to decide which dreams are worth pursuing.
How much am I willing to invest in this business now?
Just because you have set a realistic target for your business doesn’t mean that you won’t have to put a lot in to reach it. Building a business takes time, passion, hard work, and money. While many some entrepreneurs are fortunate enough to have help and support along the way, most business owners can expect to have to make a lot of personal sacrifices before their reach their goals. Unfortunately, no one knows at the beginning exactly how much investment it will take. A few business owners may find that it will take less than the expected, but most will find that it takes far more. If you fall into the second category, that also likely means that you will have to make a decision at some point of how much is too much. While it is sad to see any worthy organization fail, it is much more painful to see when that failure comes only after the business owner has given more time and money than they could afford to lose. When that happens, it can mean financial hardship and personal difficulties long after the business is gone. In order to help protect yourself, it is best to decide early on what your limit will be and discuss that decision with someone that you trust to help keep you accountable. Most owners who don’t set that limit on the front end find themselves unable to resist continuing to give just a little bit more…and realizing afterwards that it was a lot more than they had realized.
How is my business doing right now?
Situational analysis is a crucial part of the strategic planning process. It is very difficult to figure out the best way to reach a destination without knowing the starting point. The problem is that most businesses just assume that they have an accurate understanding of their current performance, when very few actually do. A first step in that understanding is having a good grasp on financial reports, but even that eludes many businesses. Whether the bank accounts are not reconciled, or cash inflows and outflows are properly classified, or accounts receivable are getting out of hand, there are many mistakes that a business owner can make that will complete obscure the financial picture. Past that, even small changes to the timing of a payment or how inventory is tracked can easily give a business owner false security. Even if the financial reports are correct, there are still many more questions that must be answered. How happy are the employees? How satisfied are the customers? What compliance requirements have gone overlooked and just waiting to surface as a large fine or penalty? Many owners willfully avoid doing a thorough analysis because they are afraid of what they might discover. While that fear is understandable, it is always better to learn about it while you still have a chance to address any issues, than to lament the mistakes that you can no longer correct.
What am I not willing to do to make my business a success?
No one goes into business intending to fail, and few believe that success will not require sacrifices along the way, but that doesn’t mean that most business owners don’t have limits on what they will do to succeed. For most, hopefully those limits include ethical guidelines that they are unwilling to sacrifice. While unethical practices tend to catch up with most organizations over time, making ethical decisions in the short-term can still be difficult, especially when you are under pressure. Making a commitment to those ethical standards early on, and mentally preparing yourself to be willing to face business failure before you break them, can help you avoid making decisions that you will regret later. The temptation is not always related to ethical standards, however. Sometimes the decision goes back to the price that you are willing to pay for the business to be a success (see question #3.) If you are not willing to sacrifice your long-term financial security, your physical or mental health, and/or your personal relationships in order to succeed, then make that commitment as well to yourself and to those around you. A successful business can do a lot of good for the owner, the employees, its customers, and its community. However, there can also be a cost to that success, and it is easy to get so focused on success that you lose sight of that. Answer that question early on, and remind yourself of it frequently as you invest more and more in the business. While building a successful business is a worthy goal, that success will matter little if you have to give up something far more valuable to achieve it.