We want to introduce you to Ernie DelleDonne, founder of Xperience. Ernie isn’t from the web design industry but from the business world. Ernie has had a successful career in business as a senior executive. Today, Ernie shares his knowledge as a business consultant and workshop/training provider. Although this article is not web design or development focused, the principals here are universal to all businesses. If you are thinking of embarking on a freelancing career we think you’ll find this information will help you to be better prepared.
1. Why do most new businesses fail?
About 90% of all new businesses fail within a relatively short time for many reasons. Some of the primary ones include:
- Not enough start up or working working capital
- Failure to prepare and execute a solid business plan
- Owner does not have the skill set required
- Often pay more attention to what they know versus what they need
- Not recognizing the need for change and not adapting quickly to market conditions
- Not practicing “continual” management
- Taking advice from the wrong people
2. What skill set is required as an owner or manager of a new business?
Most businesses require someone with broad skills at least until they can afford to hire skilled employees. Skills required for most businesses include sales, marketing, financial, logistics, operations. management and the “courage” to learn what you don’t know.
3. How long should it take to become profitable?
Historically most new company’s planned on being profitable after 1 year. In today’s competitive markets and with financial institutions in crisis the need for profitability or at least break even is more like 6-8 months. This increases the need for adequate capital and a solid business plan.
4. What tips do you have for new businesses?
Plan for the worst……..and hope for the best?
Build a solid foundation for your business from the very beginning. This will provide the platform to grow your business from. It is easier and more cost effective to build it right the first time and not have to rebuild down the road. Employ a plan that allows practical and affordable growth. Don’t let the market you are in dictate growth…..you should only grow when you can afford to do so. The most important thing you can do is practice “Continual Management. That simply means never take your eye off the ball, never get complacent especially when business is good and always
run your company as lean and mean as possible.
5. What is the main reason why businesses lose customers?
One word….INCONSISTENCY!
Customers hate not knowing what to expect, when to expect it, how much its going to cost, what it will look like or taste like. It drives customers crazy….think about your favorite pizza place….you know what it will look like, taste like and how long it will take to deliver it. If it was sometimes square instead of round, cold instead of hot or was sometimes delivered in 15 minutes and other times 60 minutes you would quickly find a new more consistent and dependable pizza place. Your business must deliver consistent service and consistent quality to retain customers. Surveys have shown that 49% of lost customers leave for this reason.
If you have any business questions you would like to have answered,
feel free to click here and “Ask Ernie”. Whether you are in a management position, self-employed, starting fresh, planning for your exit, Ernie can share his incite and assist you in making the right changes and decisions.
Great tips, I totally agree with you.
Thanks.
I’d say the main reasons start-ups fail are:
–They spend too much money too early, on unessential things (offices, staff…)
–They underestimate how long it takes to become successful
These points are related. The less you spend, the longer your business can survive; the longer your business survives, the better it can develop (contacts and clients).
I’m not convinced by the “6 — 8 months” startup time. It takes time to persuade people of the value of your service, especially if you’re offering something innovative. I’d expect most businesses to take years, not months, before they are well established.
Hats off to you if you manage to become profitable within 6 months.
But if you don’t, it doesn’t necessarily mean your idea is flawed.
Michael….
Thanks for your comment. I wish all my clients totally agreed with me!
Hi Mike Hopley
I think your comments are probably defined in some of my bullet points in question 1. Being under capitalized and not having the required skill set would be included under spending money too early or for the wrong things.
The comment about 6-8 months was not about being successful, the business being flawed or well established. You’re right it takes years for company’s to achieve these. It was about reaching a break even or profitable position to continue to operate the business. Many “great” busineses fail because they are under capitalized to begin with or can’t borrow until they show a profit. Reaching that point is critical to business’s that are highly leveraged.
The comment about spending less the longer your business can survive is valid in some cases but sometimes spending money in the right place, like advertising, marketing etc. pays great dividends and shortcuts your path to success and profitability.
It is important to note that in the business world success is usually defined by how profitable a business is not by revenue, customers etc. When selling a business EBITDA (earnings before interest, taxes and depreciation) is the calculation that will ultimately determine a company’s value.
Thanks for your comments
Ernie
Hi Ernie,
I think that “spending too much money” is a distinct point from “lacking capital”. For one thing, it’s usually easier to moderate your spending than to make capital appear out of thin air (or thick equity!).
You make good points about spending money in the right places. It’s difficult to strike the right balance: you need to be careful not to squander your limited funds, but parsimony can cripple a business too. I think the trick is to ask yourself, “Do I actually need this? Is it just splurge, or is it essential for the business?”
I see what you mean now with the 6 — 8 months figure.
As for selling a business: yes, profit means more than revenue (high revenue + higher costs = debt!). But really, buyers are looking at the expected future profitability of the business. This, naturally, is somewhat open to interpretation.
Hi Mike,
Your points are very valid. I try to convince my clients to practice ” Continual Management” meaning you run your business as lean as possible in good times and in bad. That means questioning every expenditure, continually looking for ways to reduce costs and increase profit.
Buyers do look for “upside” in a business when considering purchasing but it is usually based on historical profits. Most small companies don’t have an exit plan and realize this after they decide to sell their business. Understanding and marketing your company’s “upside potential” to buyers is a critical part of the process.
I like that thought. It’s all too easy to get complacent!
Because I forgot to say this earlier: good article! I’d like to see more business-related articles on TWS.
Hi Mike…
Thanks for the nice comment about the article. I agree, might make good sense to have more articles or tips like this from time to time.
Ernie