Prevent These Destructive “Burn Rate” Issues in Your Small Business

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The Bill’s Kwik Kleen-up was a business designed to provide home cleaning services to homes in a large residential area where both heads of household worked outside of the home. The owner use large savings to begin his venture. The business became popular quickly and the founder was swamped with orders. He found it necessary to hire two people to help him provide the services . After about four months of operation, with orders continuing to increase, he learned that at the end of the seventh month, he was not able to make the payroll. He had spent money on supplies, gas and other operating expenses without an adequate accounting system. 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.

This is sometimes referred to as “burn” and is a common problem for new businesses. The funds are not matched with the operations and the use of the funds isn’t controlled. It’s important to set up reliable funds management systems either with an accountant, efficient software or other available money management services to make sure the money is tightly controlled. Understanding the burn phenomena and knowing how to control it is a valuable skill for any business owner. In many cases, entrepreneurs are able to acquire venture capital and it is critical to carefully control finances. Unfortunately, many millions of dollars are lost because of mismanagement resulting in high“burn rates”. According to CB insights,“a large majority of start-ups fail 20 months after raising financing.” It is safe to say, many were not aware of the effects of “burn rates”.

“Burn rate” has been described as the rate at which your company is consuming, or burning, its financing or store of venture capital to support operations in excess of cash flow” according to  Rosemary Peavler in “What is “Burn Rate and How it is Calculated?”.

It’s important to separate your gross (total) income from your net (actual or income minus your expenditures) income. For example, Bill wasn’t watching his finances closely enough.

  • He began his business with $20,000.000 in savings.
  • In his first month, he brought in $2,000.00 in sales. His first month expenses were $1,000.00. He considered this income a success.
  • His net income was $1,000.00 because of the expenses.
  • He was lucky and brought in $1500.00 in income the second month and bought more supplies, without adequate accounting and began considering hiring extra help. He  increased his expenses to $1200.00 for the month. His net income for the month was $200.00.
  • His gross income for the third month was $1500.00 but his expenses stayed around $1,000.00. By now his net income was $500.00 for the month and his cash reserves were $21,700.00, making his net income  for three months only $1700.00.
  • He assumed that the monthly income would continue. He hired two workers at the beginning of the fourth month at a cost of $2400.00  increasing his monthly expenses to $3400.00. In the fourth month, his income was $2,000.00`and required over $1,400.00 from the cash reserves to pay workers and buy supplies leaving around $16,900.00 in reserves for the beginning of the fifth month.
  • He burned(took from cash reserves) approximately $2,000.00 each month until there were no more cash reserves. He was using cash reserves without replenishing them. He had a high burn rate. He kept his eyes on the gross income and not the net income. He eventually had scale down to become the sole worker in his business.

You can avoid these mistakes by diligently managing your money. There are several things you can do to help you do this.

First, before you open the doors of your new business, decide what type of accounting system you will use. There are some excellent ones computer programs that you can use, or you should hire an accountant. Commit to regular and precise money management. Clearly separate your actual gross income from you net income. The most important financial action you can take.

Second, design and stick to a clear operating budget. Commitment to the process, designing and sticking to a clear operating budget will be a critical component in your business. Know exactly what the cost of operating your business is and be very knowledgable about where the money goes and where it was generated. Always measure your revenue, gross profit and cash (net profit).

Third, keep at least 6 months of operating expenses in the bank.The reason for this is obvious. It is insurance for a potential slow period. Make it a part of your management strategy to project what you think you will need down the road and how you want to expand. Consider how long it will take you to get to your financial targets and align your marketing plans with your projections.

Fourth, keep a clear focus on reserving funds. Don’t buy things that you can do without. Some people let large sums of money excite them. They buy new and shiny things, go to conferences and trade shows, and basically spend money that they don’t need to spend. Conserve money. Recycle everything you can. Buy used equipment or furniture and look for shops going out of business for the things you need. There are many free services on the internet such as web site builders and plugins. Check for free versions of the business systems you need for your enterprise. Let thriftiness become one of your important Values.

Fifth, concentrate on gaining and retaining customers. Think of innovative and thrifty ways to obtain more customers and devise unique ways to keep them. Good customer relations management will help you do that. Look for affordable CRM (customer relations management) software for your business. For example, it’ll help you remember birthdays and other opportunities to thank your customers and build their commitment to your enterprise.

Become a thrifty, focused and successful entrepreneur.

 

“A budget is telling your money where to go instead of wondering where it went.” Dave Ramsey

 

 

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Design a Comprehensive Framework for Your Business

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Prepare to take charge of the management and control of your planned or existing business with a clearly defined architecture.In this article, I will call it a “comprehensive framework” for your business. Doing this will ensure that you are truly managing your business and not just working in it as the technical expert. It is the best way to see your business Vision manifested in reality therefore, it’s really helpful to design your “comprehensive framework” before you launch your business. You can study your industry and its leaders, analyze your best technical skills, and describe the various elements of your Vision.

 

While doing this, it’s important to always keep a learning attitude knowing that you will need to make changes to your framework from time to time. There’s a lot you can do to put your design on paper because of our convenient Information Age. Designing this framework is the step that takes your idea from concept to the creation of an actual business guide. I have identified 6 reasons why designing your “comprehensive framework” will help you manage and control your planned or existing business.

 

1. It identifies what’s really important to achieving your business goals. Our time can be spent in many ways during a regular day. Identifying what really matters can save time and move you closer to your goals. A framework forces you to list what is most important to your business and eliminates everything else.

 

2. It allows you to position yourself before your business begins. This will help you focus above the routine and mundane. It will help you keep the business strategy in mind above the day-to-day requirements. You will begin your business truly in the role of Chief Executive Officer.

 

3. It helps you clarify your Vision. The more you think about your business Mission, Values and Vision, the clearer they will become to you. As you study your industry and its leaders, you will begin to see how your new business will improve or simplify the processes and subsequent product or service. You will identify how your business will be unique in your industry.

 

4. It helps you to take corrective actions if your operations are disrupted. You may identify problems with your assumptions about business before you launch it. You can test your assumptions against reality. You will also be able to identify potential problems early in your actual business processes because you have this comprehensive business framework.

 

5. It will help you evaluate your progress. You will have actual guides to show where you are and whether your processes are taking you to your Vision. A comprehensive framework helps you design your objectives and targets.

 

6. Our environment is changing so fast that we can barely keep up. A business framework helps to keep you grounded in a specific trajectory that can keep you on the road to your Vision.
This framework also helps you make changes more efficiently and with minimum disturbance.

 

“The secret of getting ahead is getting started. The secret of getting started is breaking your complex overwhelming tasks into smaller manageable tasks, and then starting on the first one.”  –Mark Twain, American Humorist and Author

 

Basically, there are lots of things you can do to ensure the success of your planned or existing business that don’t require money, an office or employees. You can create the “comprehensive framework” to eventually contain a clear business strategy with operational procedures. It just takes a little time.

 

Clear recipe for designing a business framework: “20 Directives for Small Business Success: Do or Die”

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Start-Ups Have Increased in the Last Three Years

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If you have a little spare time, read on. According to Lydia Dishman in “This is the State of Entrepreneurship in 2016”, Fast Company, the number of new businesses has increased and their subsequent growth has increased for three straight years. Startups continue to play an important part in the economic health of our country. If you have a dream, a passion or a vision for contributing to an industry, now is the time to act on it.

First, you will need to find your passion. Designing and building a business requires the owner to love what they are doing.  In “6 ways to Find Your Passion”, Corrina Gordon-Barnes states that you need to “adopt the perspective that you can do what you love with your life.” Once you have found what would be more like play than work to you, you are ready.

“Chase the vision, not the money, the money will end up following you.” – Tony Hsieh, Zappos CEO

Don’t be concerned about the money at this point. There is a lot you can do toward your business without money. Basically, you can design and plan. You can design your Mission, Values, and Vision. You can research your desired business name as well as other pre-launching activities. Take time to carefully construct these elements because they will become the foundation of your enterprise.

Begin studying in your industry and determine who the leaders are and what unfulfilled needs exist in your field. The “Google Instant Library” and “YouTube University” can provide all the knowledge you need and these are free. Use your time wisely and look forward to the many advantages of owning your own business.

One of the primary advantages of owning your business is that you can control your destiny. You will not depend someone else to influence your future. You can move ahead with your personal vision of “the good life.” Another reason is that now more than ever, you can work from anywhere. You can work from home, in another country, or on the beach. These are just a few of the many advantages of being your own boss. Consider this and start planning.

 

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Do You Understand the Complexity of Your Business?

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Simplicity vs Complexity

 

 

A study of why small businesses fail is quite helpful for the entrepreneur to understand before he/she starts a business but it can also help an existing small business understand why their business is not as successful as he/she hoped for. A full investigation of why startups fail is reported in the CB Insights article “156 Startup Failure Post-Mortems”. One of the major reasons found was the owners did not understand the complexity of the business before they launched. When the real complexity of the business is not understood, the owners will experience all kinds of problems. Among the problems are missed deadlines, inefficient systems, financials issues and customer acquisition and retention.

Roger Sessions, author of “Simple Architectures for Complex Enterprises”, estimated that Information Technology company failures cost about $1 trillion dollars in loses for the U.S. economy. His report analyzed IT enterprises and their software projects only, but not being aware of the complexity of the business occurs in various types of startup enterprises across the board.

This situation can be avoided by basically doing your homework before you put too much effort and money into your business. Of course, there are many things that you can include in your pre- business homework, but I’ll highlight two here that will help you begin to understand the level of complexity you will be working with.

Prepare Benchmarking Targets – A benchmark is a reference for checking your business operations against your industries best practices or standards. You will be doing this before you design your systems or if you are already in business, you can use what you learn to make the necessary adjustments that can fortify your enterprise. In other words, check to see how the most successful enterprises in your field operate. This may be time consuming because all of your research may not be available on the internet; you will need to actually visit similar businesses to understand how they operate. This kind of study can help in so many ways. It might help you determine whether or not you really want to go forward with you venture; but it could also help you realize the uniqueness of your business idea and how your brand will be different form the others. Most of all, this study will help you realize the level of complexity that you will be dealing with.

Conduct Pilot Studies – Conducting studies to determine what your customers need and how you will deliver your product/service can serve various purposes. First, it will help you to see whether or not your product/service is something that customers want and will pay for. This is what is called “product market fit”. It’s determining if your offering is valuable to the customers or does it solve a problem for them. As entrepreneurs, we see the value of our business idea but sometimes the value of a new offering is not evident to potential customers. Second, the studies will let you know what procedures are needed to get your product/service to the customer quickly. It will also allow you to simplify and enhance the experience of your customers as you serve them. Customers want a system that is easy to use and hassle free when dealing with your company. The complexity of both of these processes will be revealed when you conduct tests or pilots.

Developing and simplifying your business systems will be one of your most important tasks. Learning about the inherent complexities of your industry systems will help you determine your readiness to work with and simplify the necessary systems for your successful business.  Simplification could be your most important contribution to the industry!

“The first problem (for entrepreneurs) is not fully understanding what they are letting themselves in for. It’s important that you go into any new venture with your eyes wide open. In all honesty you cannot do enough research and homework before you start. The more unfamiliar the territory is to you, the higher the implementation risk.” David Mellor

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3 Things To Do Before You Start A Business

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“The critical ingredient is getting off your butt and doing something. It’s as simple as that. A lot of people have ideas, but there are few who decide to do something about them now. Not tomorrow. Not next week. But today. The true entrepreneur is a doer, not a dreamer.” –Nolan Bushnell, founder of Atari

When you get that great idea to start a business, it is very exciting. You just can’t wait to get started. You can see yourself as a great success in the future and you are highly motivated to do whatever you can to make your dream come true. However, there are some important administrative things that you must do before you launch your business. In this article, I will briefly describe the things necessary for a viable business. These steps are greatly simplified, but they are a good beginning for your plan to start your business.  Right now, you may be at any stage of the process, but these procedures must be completed.

  1. DSC_03511Determine an interesting and attention-getting name for your business.Your name will be an important part of your “brand” so make sure it is a good one. After you have chosen the name, test it on the internet in various forms to see if it is being used by anyone and if that search doesn’t show the name in use, you may be good to go. The next thing you must do is to secure the name as a domain name for your website. Web hosts do a great job of telling you whether or not the domain name has been taken. In most cases, your business name and domain name will be the same. However, it’s up to you. At this point, you’re ready to design your website.

2.  Check with your Secretary of State concerning incorporation processes.
This is necessary also to determine whether or not the name you have chosen is available to you and incorporation is also required for you to operate as a legitimate business. There are various type of corporations that you might choose from. Use the one that best fits your situation.

3.   Design a logo and have it registered as a trademark. This offers one level of assurance that your creation will be protected. This is done through the Federal Trademark system. They complete a thorough search of your business name and this helps to assure you that your work is protected. It is also helpful for building the legitimacy of your business.

Doing these things will give you a great sense of accomplishment and make you feel more secure as you move forward in your new enterprise.

See also: Where is your business going?

The President of Your Business Strategy

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6 Ways to Grow a Great Business

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Everyone who starts a business wants it to succeed.  Many “fly by the seat of their pants” and most end up failing.  Some may succeed for a while, but they soon learn that using the shoot in the dark method does not work. So rather than going the blind way, you can used tried  and tested methods to increase your chance of success. I have greatly simplified and summarized 5 ways to grow your enterprise.  Of course, these are  not in any way definitive, but they do offer a general framework

for your envisioning and planning that are the most important things that you must do if you want to be successful.

1. Keep control of your Vision

      It is important to keep your Mission and Vision in mind always.  We can easily become distracted in the complex world we live in and it’s  sometimes difficult to stay focused, however, building your business is the most important thing in your life right now and a commitment to stay focused on it will be the most rewarding thing you could ever do.  

“Focus and determination beat brains and intellect every time.  If you focus on the right things, and work at them often, you will achieve exceptional results.” Unknown

  1.  Design Systems.

     Systems help you manage your enterprise, with orderly procedures that can be taught to others, used for measurement and documented.  This is one of those things entrepreneurs with great technical skills don’t want to do.  They want to keep busy providing the service or product that initiated the business, however, I can’t emphasize enough, the importance of taking time to document all of your working processes.  These Systems are the objective measures you will use to actually see the progress of your enterprise and will help you know when to persevere in a direction or change something.  You can think of many businesses that work through well designed systems.  The fast food industry is an excellent example.

“Organize around business functions, not people.  Build systems within each business function.  Let systems run the business and people run the systems.  People come and go but the systems remain constant.” Michael Gerber, E-Myth Revisited.

  1. Commit to constant improvement.

    We live in an ever changing environment; improvements in all areas of life are constantly required.  As entrepreneurs, we need to keep up with the best processes and information for our businesses.  Therefore, we must constantly learn and constantly improve. We must also think of unique new approaches or products to bring into our businesses if we want to lead the industry.  If good systems are in place, it’s not difficult to see where new methods, equipment, software, or innovation is needed.  Great business owners have a learning attitude and can see how new learning can improve their enterprises.

“Innovation distinguishes between a leader and a follower” Steve Jobs

  1. Use good people management skills.

   You need people to help your business survive and flourish.  Knowing how to manage people in a way that contributes to the growth of both your business and the people involved is required.  The employees of today expect their jobs to offer a better quality of life as well as monetary rewards.  Knowing how to do this is an invaluable skill for the manager of a growing business.  It is important to hire the right people from the start.  You will need people who share your Mission, Values and Vision as well as owning the knowledge, skills, abilities and talent necessary to work your systems. After people are hired, an efficient on-boarding system will eliminate many problems that sometimes occur with new hires.  Today’s employees also want to continually grow; so, incorporate advanced training and learning into your systems that will help you motivate and retain good employees.    Your systems will help you manage performance effectively.

“Inventories can be managed, but people must be led.” Ross Perot

  1. Build a great business culture.

    The way people work and relate in your business is defined by the culture that  you, the Founder adopts, models and promotes.  Do you have a culture of extreme professionalism or a laid back fun culture or something in between?  Current research has identified the most productive cultures, but before you can move toward the ideal, you must first determine where you are as it relates to business culture. The way people work and relate in your business is defined by the culture that the Founder is comfortable working in.  Do you have a culture of extreme professionalism or a laid back fun culture or something in between?  Current research has identified the most productive cultures, but before you can move toward the ideal, you must first determine where you are as it relates to business culture. Learn more at  geniuscore.info/?p=1255

“Businesses often forget about the culture, and ultimately, they suffer for it because you can’t deliver good service from unhappy employees.” Tony Hsieh

  1. Bootstrap.

Resolve to eliminate debt before you add any new expenses.  Use your first profits to get out of business debt or don’t get into it and after that, all of your profits can go into building the business, not paying debts.  Increase efficiency where possible because this will decrease costs; clear up blockages in your systems and increase free or low cost marketing efforts to attract more customers.  This will provide slower growth, but you won’t be burdened with dreaded bills to pay or actions to justify for investors.  Look at this example:

Dreamstime.com

“We’ve proven that it can be done.” “Myself and the leadership team at Dreamstime.com have never taken loans, used credit cards or tapped angel investors to grwo our business.” N. Federico

 

Consider these methods as you grow your highly successful business.

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