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Why do small businesses stay small?

CategoriesCFO / SME / Startup

James Malcolm

February 10, 2017

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Why do small businesses stay small?

Not all business owners have ambitions to grow their business into something big. They don’t want to take on the extra risk or over extend themselves, they are happy to make a living and let the business dawdle along.

However, many small business owners would like to grow their operations significantly. But many fail. In this article, we delve into these roadblocks to growth.

small business growth

Lack of investment

Few companies can afford to make investments in systems, talent or sales and marketing using their working capital. Capital is often not easy to come by when your small and or starting out. If Owners want a loan it will often need to be secured with a house or other personal assets, or if unsecured pay a 25% plus interest rate. Equity investment is often hard to come by unless the company has a big point of difference and solid growth metrics & financial performance. When a company is starved of the cash they need, they often enter the below cycle, resulting in missed opportunities and stagnation.

 

A side effect of not having a strong balance sheet and tight cashflow is the anxiety and indecision that grips owners. Decisions are fretted upon, particularly when they involve hiring people and capital investment. Knowing that you have financial backing has a powerful effect, it allows an owner to make decisive decisions and aggressively pursue opportunities that may not have an immediate return.

I have seen first-hand how the right amount of cash can supercharge growth. Knowing that they have financial backing shifts the owner’s mentality, where they used to see a problem they now see a possibility.

Risks can be taken, investments without an immediate ROI can be made. Things like PR, brand and content marketing more often than not have no immediate, direct effect, but they are like watering a plant. In the long term, they usually payback.

Fear of risk and failure

Mentality is key to winning in sport, business and most things in life.

Most small business owners have everything on the line, frequently their family home is mortgaged and significant capital has been invested. So, it’s easy to understand their tendency to be conservative and apprehensive about taking calculated risks.

Taking risks is a necessary evil in business; hiring that person when cash is tight, investing in marketing when things are a bit slow or expanding into a new country are nerve racking decisions to make. However, taking risks is necessary to survive and grow. Are you the hunter or the hunted?

Owners spending too much time working in the business and not on it

Operating on a shoestring means small business owners are constantly wearing a number of hats; managing staff & customers, fighting fires, selling and doing admin often results in a lot being done, but nothing done particularly well.

Owners / management need to be thinking about the big picture regularly, as opposed to being focused on operational tasks and execution. Without the right level of resourcing they lack the bandwidth and clean air to think about growth opportunities, long term objectives and do adequate planning. Not doing this stuff results in missed opportunities and ultimately keeps a business small.

Insufficient planning and analysis

Benjamin Franklin said it best when he said “if your failing to plan your planning to fail”. It may be cliché, but it has been proven across most spheres of life that planning and monitoring performance results in a better outcome. If you were to run a marathon, would you leave it to chance? Most runners would plan the increases in KMs over the weeks of their training program. Then they would measure their performance vs the plan. The reason they do this is it increases their chances of success. Business is no different, winning is a long drawn out process for most, success manifests over years not days. Having a well thought out plan is critical.

Decisions made solely based on intuition

Some people have an innate ability to predict market trends and know the boom areas. Think the lady who started boost juice or Warren Buffet who consistently invests in companies that grow in value.

For the rest of us mere mortals without a crystal ball or a three-leaf clover, we need data, logic and insight to make sound strategic decisions. Decisions that remove emotion from the equation. Decisions backed by data, decisions that look at the financial implications of different options.

No business case is perfect, in fact they are usually highly flawed. But, the reason big companies have decision making frameworks – utilising business cases and review boards is because the forecasts, discussions and reviews; facilitate sounder, more rational decision making.

Do you make your decisions purely on gut or are you disciplined in your approach?

CFOs on demand provides outsourced financial support to startups and SMEs specialising in performance & planning, strategy and assisting with cap raises.

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