Summer 2005
Five Top Biz Killers

Why do most start-ups fail? As it turns out, the answer rarely lies with the location or product—even though many retailers think it does.

It’s not unusual for an owner to look back on a failed enterprise and say, “I was in a bad location” or “My biggest supplier wasn’t reliable.” But the fact is, even if either of them are true, the underlying problem is simply this: poor planning. Blaming a bad location is just another way of saying, “I didn’t take the time before opening to find out who my best customers would be and what their shopping patterns are.” Blaming an unreliable supplier usually translates to “I didn’t investigate my supply options thoroughly before opening.”

Sure, bad things do happen to good start-up retailers through no fault of their own. But bad things usually happen because of bad planning, or what Patrick O’Rourke, CPA, refers to as poor management. “More small business start-ups fail than succeed, and the majority of small business failures should never have been attempted in the first place,” O’Rourke says. “The main cause of small business failure is poor management, and the failure to perform adequate research… is one element of poor management.”

But more than one element of poor management contribute to start-up failure. In fact, reasons for failed start-ups fall into five categories:

  1. Poor planning
  2. Overestimating one’s own skill and ability
  3. Inadequately trained staff
  4. Insufficient capital
  5. Sloppy or ineffective procedures or systems

But look again: #2-#5 are actually subsets of #1. But each one deserves a close look, and each one includes a “start-up solution.”

Poor planning

Poor planning causes myriad problems for a start-up—picking the wrong location, over-dependence on one supplier, lack of clear and attainable goals for the owner and employees. Any of these problems can lead to others, such as hiring employees with the wrong skills, or depending too heavily on sales to key customers. The key to avoiding these problems? A well-conceived business plan.

Asef Nazeer’s Web site, freebizplan.org, is one of thousands that offer advice on writing a business plan. Even though his info is free, he cautions anyone considering writing a business plan to use business-plan software. “The best plan software costs between $100 to $150 and gives detailed advice and step-by-step guidelines on how to prepare a comprehensive business plan including financial projections,” he says. The cost of the software “is minute, considering the cost, time and effort that you save, which might be anywhere from $500-$10,000+ depending on the size of your business.”

Business plans follow a set format that will force you to look at every aspect of your business from an objective perspective, which in the end will give you a greater understanding of your product, your future customers and your business’s key strengths (and weaknesses). That knowledge alone will increase your chance of success.

As you write your business plan you’re likely to expand or clarify your goals, zero in on your target market, anticipate difficulties, identify new opportunities, avoid being undercapitalized, and create effective strategies for managing day-to-day operations and future growth. A thorough and carefully executed plan will also give you credibility with lenders. And it will provide a benchmark, so you can see if you’re meeting your financial goals as sales come in.

Start-up solution: Don’t hire someone to write your plan for you. Write it yourself, with or without software that guides you through the process. A Google search for “business plans” will yield thousands of free business plan samples, along with a lot of detailed advice if you dig a little. To help you write each section of your plan, form your team of people with the appropriate areas of expertise. Talk to local business owners and your Chamber of Commerce for insights into the local market. Go online to the Small Business Association (sba.gov) for a wealth of statistics, information and advice. Talk to your banker, lawyer and accountant to find out what you should be aware of in each of their areas. Talk to specialty retailers about the pitfalls and successes they’ve experienced. And don’t overlook mall management: they’re an invaluable source of data on expenses, demographics, traffic and consumer-buying patterns.

Overestimating one’s own skill and ability

In January 2005, the SBA released a report entitled “Entrepreneurial Risk and Market Entry,” which looked at the two areas of uncertainty every start-up entrepreneur faces: 1) uncertainty about market demand: and 2) uncertainty about one’s own entrepreneurial ability. What they found was that “entrepreneurs are risk-averse toward market demand, but are overconfident with respect to their own abilities.”

Overestimating your abilities can lead to a lack of clear vision, poor management controls, underestimating the competition, and even the choice of poor-quality products or services.

Lack of practical experience top many “why they fail” lists, but savvy entrepreneurs know how to compensate for their weak areas by gaining the skills they need and/or hiring people who have those strengths—before they open for business. But to compensate for their weaknesses, though, they first have to challenge their confidence, and realistically appraise their skills in many different areas.

For example, you may be an exceptionally gifted crafts-person with a colorful crafts kiosk that will catch the eye of every shopper who passes by. But if you don’t know how to create or even read basic financial statements, chances are that once you start selling, you won’t know how much money you’re taking in or how much profit you’re making. And that’s just a part of the picture. Rather than overestimating your ability, find the people, organizations or publications (in print or online content) that can give you the financial skills you need to run a business and keep it going successfully.

There are also “personality skills” that might play prominently during start-up planning and should not be ignored. For example, if you are not a self-starter or have problems making decisions, you might be overconfident thinking you can start and run a sole proprietorship. Perhaps a partnership, with a person who is skilled at setting goals and delegating would be a better choice.

Along the same lines, if you’re an “independent thinker” with your own “great ideas” and you are considering a franchise that requires franchisees to follow strict guidelines of operation, you might be setting yourself up for disappointment, when you could have had a better chance at success by choosing a business that was better suited to your strengths and your vision for what type of business owner you wanted to be.

Start-up solution: Take a no-holds-barred look at your personal and professional strengths and weaknesses. The key is to identify the areas where you might be overconfident and get the help you need. Ask yourself what you can do to counter them one by one, by partnering with someone, or by educating yourself—before it becomes obvious to your customers, your employees or your banker that you might have gotten in over your head.

Inadequately trained staff

You don’t have to have a PhD, as Bob Nelson does, or write best-selling employee-management books or teach corporations how to train and motivate their employees effectively, as Nelson does as president of Nelson Motivation (San Diego), to know that poorly trained employees can wreak havoc on your retail business.

“Poor training translates into mistakes in products and services, both of which customers end up getting—and having to have replaced or corrected,” he says. “Many customers along the way don’t want the hassle, and will vote with their feet to shop elsewhere.” And that could mean little or no repeat business for your start-up.

Poorly trained employees don’t just impact sales, but other aspects of the business, as well. They not only don’t get their jobs done, they also affect the other employees, who “have to work around the problem, often doing the person’s work for them,” says Nelson. What’s more, the store owner “has to spend his or her time doing the things that the people they’ve hired to do aren’t doing!” Or the owner is “constantly pulled into problems and customer complaints that should not have occurred,” he says.

Clearly, the negative effects of inadequately trained personnel reach far beyond the cash register and will sap needed energy from your start-up just as you’re getting going. Now is the time to determine what type of training you will need and put the systems in place that have you and your employees operating at peak performance.

Start-up solution: Train your employees. At the very least, you need to train them to use the cash register or POS system; greet customers appropriately; explain or demonstrate your product(s) in detail; process sales, track and replenish inventory; and handle customer problems or complaints. Training in back-office systems, quality control or safety may also be needed, depending on your business. Once you have a complete list, find out which training information you can find rather than starting from scratch. For example, many POS system vendors provide training onsite, online or software. There are many good examples online of employee handbooks and business-operations manuals you can use as templates. (Start with Google and go from there.)

Insufficient capital

Every retail entrepreneur has to count on sales to pay the bills at some point, but that point isn’t likely to be Day One, or even Day One Hundred or beyond. Many entrepreneurs don’t realize how long it will take to reach the break-even point, and are caught off-guard with insufficient working capital—too little money set aside in advance to pay operating expenses. You have to have enough on hand to pay the bills until you become profitable—but to do that, you first have to know what your expenses will be. Or at least have realistic estimates. “If realistic estimates are not used in the exploratory stage, the result is likely to be failure,” says O’Rourke.

Most entrepreneurs are optimists, he says. They “generally overestimate revenues and underestimate expenses.” So it’s important to get information in order to make realistic projections, he says, “especially if you’re relying on outside money for capital.” He suggests that a way to get good input about your projections is to ask a business operator in a different geographical area to look them over. “You’d be surprised: a lot of existing business owners are willing to help.”

Start-up solution: Go over the numbers with your accountant. Together, thoroughly review all of the financial estimates in your business plan, including the sources of your data. Are your calculations, such as the break-even point, correct? Are there strategies you can use to cut certain expenses if anticipated revenues take longer than expected to appear? What about paying on loans, and what will those payments mean to your bottom line?

Also talk to other specialty retailers and mall management to get a good handle on routine costs you’ll have, and what unusual costs might come up. Again, the Web is a great source for start-up checklists that will reveal some expenses you may not have considered. Once you have a realistic list of expenses you can anticipate, you will be in a much better position to produce a realistic business plan that makes clear exactly how you can and will succeed.

Bad systems

The best business plan, the best management, the best employees, and a tower of cash still won’t guarantee success if you don’t keep track of your sales, inventory, bookkeeping, employee schedules, payroll and taxes. Inefficient or inadequate systems and procedures will hurt your business, but won’t show up on your profit-and-loss statement in big red numbers. After all, there’s no P&L line item for the value of hours lost tracking down inventory that should be on the shelf, or dealing with a temperamental POS system.

The wrong POS system alone can make your retail life miserable and affect the bottom line. Some new retailers buy a high-end POS system to handle future growth, when all they need now is a lower-end system to get started. Some new retailers often try to handle their own bookkeeping and payroll, only to find they’re too busy selling (and often too tired at the end of the day) to give these crucial tasks the attention they require. But with effective systems in place, they can see increased profit margins thanks to better inventory management, better staff performance, accurate purchase orders going out quickly, accurate inventory coming in quickly and, of course, increased sales.

Start-up solution: Determine which systems and procedures you need for your business to run smoothly. A wealth of bookkeeping, accounting and payroll software packages is out there, as are thousands of companies that offer these services on a consulting basis, so you don’t have to go it alone. For sales-floor and back-office functions, investigate the options that are right for your business, from a cash register with a paper trail to a fully automated system like Quick Books Retail (back-office) and Quick Books POS (point-of-sale).

Bottom line

It’s all about planning. Every year specialty retailers close their doors due to poor planning in one form or another. Even if you’ve already started your retail business, you too can benefit from this advice. It’s never too late to do the critical advance planning that helps stave off start-up failure and ensure retail success.

Nancy Tanker

Nancy Tanker is the former managing editor of Specialty Retail Report. She has covered the specialty retail industry for nearly 15 years for a variety of publications and can be reached at srrtanker@mchsi.com.
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