Three ways small businesses are vulnerable (and how to make your business resilient)

Kurt.nzBusiness, career, finance

It’s heart wrenching to see so many small businesses having to close their doors for good. Owning a small business is like having a baby. Sleepless nights, lots of hard work, plenty of trials. But ultimately a sense of pride in watching it grow and develop. So to see it all disappear is a real sense of loss.

From what I’ve seen and the people I’ve spoken to, there are three ways small companies are going out of business over this time. Over the years I’ve closed businesses for each of these reasons.

The cause is simple and very clear. Lack of revenue. Starve a business of its lifeblood and eventually it’ll die, some quicker than others. But some are particularly vulnerable, like the companies below.

  1. The first example business is doing OK before the COVID-19 lockdown, but now the reduced revenue doesn’t cover overheads. This is the most common business that is closing at the moment. There is the wage subsidy and the business finance guarantee scheme. But unless the owner can see a significant upside in the near future, they’re not bothering. Why go into debt if you’re (hopefully) going to go back to just being OK. And on top of that, you have a loan to pay off. It’s simply not worth the risk.
  2. The second example business is one that’s either just starting out, or was going through a significant change. Cash is tight in either of these situations. That should mean the business is used to running on a shoe string. But the other major factor is the owner’s motivation. You need a lot of it to start or change a business. To be dealt a blow at a critical time like this could be enough for owners to throw it in altogether. Starting a business always takes more energy than you think. It’s difficult to hit pause. Usually a pause leads to a stop. I’ve been in business long enough to recognise these ‘motivational cycles’. For me, the key is to have systems that allow you to get lots done when motivation is high. And systems that protect what you’ve built, when all you want to do is walk away from it.
  3. The third example business is one that was doing really well, and expanding. This is the less obvious one that is failing. If the business was doing really well, surely it can handle a period of no sales? Not necessarily. Usually when a business is doing well there are lots of little expenses and inefficiencies that we’ve lost control of. You tend not to tweak something as much if all you’re doing is growing. Human nature is to see a trend and think it will continue forever. If we experience growth, we tend to think it’s going to continue. So we sign up to long term contracts, we take on a lease that allows for expansion, we take out loans, we plough all the profits back into growing it more, we leverage up. We’re less careful. But all these things are built on the premise (and require) that there will be continual growth. It’s a vulnerable structure that can come crashing down. Businesses that fail like this tend to come out of the blue because on the surface things are going really well.

So how do we build a more resilient business? One that survives economic cycles, and hopefully even the once-in-a-lifetime event that is COVID-19.

  1. Ensure you have enough cash to cover the term of any long term commitment. Even if revenue goes down. Negotiate the best terms possible. And plan for the worst case because that’s what agreements are for.
  2. Minimise the risk in everything. E.g. if you’re about to sign a lease on a building, what happens if you don’t need it anymore? Can you reassign the lease? Can you sublease parts of it? Always have a backup plan.
  3. Don’t take on big commitments until absolutely necessary. Ignore vanity metrics such as size of company building, flash cars etc. Only get something you really need and is going to add value (profit) to your company.
  4. Organic growth is more resilient than stimulated growth. You may not grow as fast but you’ll be able to weather the cycles.
  5. Diversify. Never be completely reliant on one supplier, one path to market, one product. Otherwise you’ll only be as resilient as your weakest
  6. Have a plan B, and C. What happens if your main supplier goes out of business? What happens if you can’t access your building for a period of time? Build flexibility into everything. And ask yourself lots of if/then questions.
  7. Build a resilient team. One that trusts each other, and one that trusts that you, the owner, are going to do the right thing. A business crisis is a great way to test your company culture. Your employees will either be dusting off their CV’s or seeing what they can do to help because you’ve built a great culture.