The Great Recession killed off 170,000 to 200,000 small businesses between 2008 and 2010. Yet, almost miraculously, some small businesses not only survived, they prospered.
What was their secret? Why do some businesses seem to have nine lives while others meet an early demise?
Let’s look first at why businesses fail.
Most business failures can be traced to inadequate planning. It is essential that every small company have a business plan and a system to operate it. Without a plan, all kinds of bad things can happen.
For example, undercapitalization is a common mistake. New or small businesses often spend all their start-up funds trying to get the doors open. Working capital can be difficult for new companies to find, yet a company’s business plan and budget should include start-up working capital as well as sources for ongoing working capital.
Another common pitfall is lack of business expertise. Small-business owners tend to have strong skills in sales, or engineering, or product development, for example, but may be weaker on the accounting side. In such cases, the owner may put more weight on generating sales while neglecting collection of accounts receivable. That, inevitably, leads to trouble.
Management problems also can cause failures. While absentee management is very difficult, it’s common when owners have multiple businesses or locations, or are nearing retirement. For businesses with multiple owners, partnership agreements may cease to work as intended. An agreement between owners, whether formal or informal, must be continually reinforced.
Finally, lack of adaptability and contingency planning can scuttle even the best business model. What happens if road construction restricts access to the business for several months? What happens if the company’s product or technology becomes obsolete?
Now, let’s look at the flip side. What are some common survivor traits?
First, survivors control spending. I’m reminded of a customer who was forced to reduce all employees’ wages by 10 percent, including the officers’ compensation. The employees weren’t happy, but knowing the owners took a pay cut made it a little easier. After the economy rebounded, everyone’s pay was increased again and resulted in stronger employee morale and a feeling they were “all in it together.” That’s another key — the ability to make difficult decisions.
Small businesses that survive difficult times also tend to be those that reduce debt. Even with drastically reduced revenues or slashed margins, many companies have survived because they did not leverage themselves. It’s worth noting that these are also the companies that are now thriving.
Another key to resiliency is making reasonable lifestyle choices. Owners who have cut back on vacations or extravagant spending stand to make it through any recession.
An additional hallmark of survivors is nimbleness. The ability to anticipate market trends and reinvent the business is a crucial element of survival. And that requires business owners not just to anticipate changing customer needs, but to always know where they are with regard to revenue and expenses.
If there is one top piece of advice for small businesses, it is to regularly seek assistance from those with expertise not found in-house. Established partners such as the Small Business Administration, SCORE and local business organizations that can provide financial and planning support can be a small-business owner’s best friends. That also goes for bankers, CPAs and attorneys, with whom owners should meet regularly to discuss short-term, mid-term and long-term goals of the business.
To be sure, no business can master the economy. The key is not to let the economy master the business.
John Irwin is president of Huntington National Bank’s West Michigan Region.