Jerome has always been good with organizing spaces and increasing the functionality of those spaces. Several friends suggested he should try developing a business that would showcase his special talents. He agreed that he might enjoy this type of business so he began the process of building his own business. Jerome’s company was a business designed to provide home cleaning and organizing services to homes in a large residential area where both heads of household often worked outside of the home. The business became popular quickly and Jerome was swamped with orders. He found it necessary to hire two people to help him provide the services for the homes. After about ten months of operation, with orders continuing to increase, he learned he wasn’t able to make the payroll. He had spent money on supplies, gas and other operating expenses without doing adequate accounting and he wasn’t able to secure additional funds, so he scaled back to being the only one in the business and never grew to the great business he hoped for.
Can you imagine the feelings of disappointment, regret and embarrassment he experienced? He thought about all the money and time he wasted as well as the disappointment his new workers experienced. This failure will stay in his memory forever.
Why did this happen to someone with such great potential?
This is referred to as financial “burn” and is a common problem for new businesses. A study completed by CB Insights revealed 29% of the business failures they studied simply ran out of money. Of course a detailed analysis would show many reasons these businesses ran out of money. However, one prevailing reason is the funds were not matched with the operations and the use of the funds was not controlled therefore more money was spent than came into the business. Jerome had a nice sum of money from his savings that he thought would carry him to a profitable stage but he made 3 critical mistakes.
“Balancing your money is the key to having enough.”
First and fundamentally, Jerome had no knowledge of business development requirements. He wasn’t aware of the management skills needed to build a successful business. He believed his special talent would automatically lead him to success. This is far from the truth. New owners must work on building the business, not just work in the business. They must do both. This is the function of management skills. Mission/Purpose design, strategic planning, systems design and employee management are just a few of the skills a growing business will require. A little time acquiring these skills would have helped Jerome build a successful business.
Second, Jerome didn’t take time to design a plan for building and growing his business. He had no idea about the service targets, financial targets or growth targets. Things just happened without him using any controls to guide him as he worked. Planning is essential to successful business development. The shape the business will take is up to you, the owner. Otherwise, it will go in any direction and eventually end up in failure.
Third, he assumed the money would cover his expenses because it was a fairly large sum of money from his savings. He really believed there was no way he would run out of money so soon. He assumed the money would always be there for what he needed. This may seem a little nonsensical, but it happens more than you might think. Entrepreneurs get large sums of money from venture capitalists and assume that the money will carry them through. In their heads, it just seems right. They may even have written financial projections but the reality doesn’t automatically match the plan, or they don’t actually control the money according to the plan. They make decisions based on positive or desired assumptions. According to Matt Mansfield, there are many administration tasks you can do in the cloud to help you make better decisions. Such as accounting, payroll and customer support using data from your actual operations.
Fourth, Jerome didn’t analyze the need or research the requirements for adding employees. He wasn’t aware of the additional finances or additional supplies needed when adding two employees. He didn’t do the appropriate homework. He didn’t realize the expenses required by IRS Federal and State guidelines. These required additional funds he hadn’t counted. There were transportation costs and equipment costs that were not accounted for.
The sad truth is, Jerome would have run out of money even if he had been able to secure additional funds. He would have run out of money because he didn’t have the skills needed to manage his business and consequently, balance his money. Unfortunately, many new ventures can get more and more infusions of money and still fail because the managers don’t have the appropriate skills. This isn’t necessary, particularly in this Information Age. Basic management skills can be learned easily. Be prepared to manage well.
See easy to follow management guides for business development: “20 Directives for Small Business Success: Do or Die”