5.7 How to Succeed in Managing a Business

Learning Objectives

  1. Discuss ways to succeed in managing a business, and explain why some businesses fail.
  2. Identify sources of small business assistance from the Small Business Administration.

Why Do Businesses Succeed?

Being successful as a business owner requires more than coming up with a brilliant idea and working hard. You need to learn how to manage and grow your business. In the process, you’ll face numerous challenges, and your ability to meet them will be a major factor in your success (or failure) (D&B, 2008). To give yourself a fighting chance in making a success of your business, you should do the following:

  • Know your business. It seems obvious, but it’s worth mentioning: successful businesspeople know what they’re doing. They’re knowledgeable about the industry in which they operate (both as it stands today and where it’s headed), and they know who their competitors are. They know how to attract customers and who the best suppliers and distributors are, and they understand the impact of technology on their business.
  • Know the basics of business management. You might be able to start a business on the basis of a great idea, but to manage it you need to understand the functional areas of business—accounting, finance, management, marketing, and production. You need to be a salesperson, as well as a decision maker and a planner.
  • Have the proper attitude. When you own a business, you are the business. If you’re going to devote the time and energy needed to transform an idea into a successful venture, you need to have a passion for your work. You should believe in what you’re doing and make a strong personal commitment to your business.
  • Get adequate funding. It takes a lot of money to start a business and guide it through the start-up phase (which can last for over a year). You can have the most brilliant idea in the world, the best marketing approach, and a talented management team, yet if you run out of cash, your career as a business owner could be brief. Plan for the long term and work with lenders and investors to ensure that you’ll have sufficient funds to get open, stay open during the start-up phase, and, ultimately, expand.
  • Manage your money effectively. You’ll be under constant pressure to come up with the money to meet payroll and pay your other bills. That’s why you need to keep an eye on cash flow—money coming in and money going out. You need to control costs and collect money that’s owed you, and, generally, you need to know how to gather the financial information that you require to run your business.
  • Manage your time efficiently. A new business owner can expect to work sixty hours a week. If you want to grow a business and have some type of nonwork life at the same time, you’ll have to give up some control—to let others take over some of the work. Thus, you must develop time-management skills and learn how to delegate responsibility.
  • Know how to manage people. Hiring, keeping, and managing good people are crucial to business success. As your business grows, you’ll depend more on your employees. You need to develop a positive working relationship with them, train them properly, and motivate them to provide quality goods or services.
  • Satisfy your customers. You might attract customers through impressive advertising campaigns, but you’ll keep them only by providing quality goods or services. Commit yourself to satisfying—or even exceeding—customer needs.
  • Know how to compete. Find your niche in the marketplace, keep an eye on your competitors, and be prepared to react to changes in the marketplace. The history of business (and much of life) can be summed up in three words: “Adapt or perish.”

Why Do Businesses Fail?

If you’ve paid attention to the occupancy of shopping malls over a few years, you’ve noticed that retailers come and go with surprising frequency. The same thing happens with restaurants—indeed, with all kinds of businesses. By definition, starting a business—small or large—is risky, and though many businesses succeed, a large proportion of them don’t. One-third of small businesses that have employees go out of business within the first two years. More than half of small businesses have closed by the end of their fourth year, and 70 percent do not make it past their seventh year (Knaup & Piazza, 2011; Knaup & Piazza, 2007).

Table 5.2 Survival Rate of New Companies

Number of Years after Start-up Rate of Survival
1 81.2%
2 65.8%
3 54.3%
4 44.4%
5 38.3%
6 34.4%
7 31.2%

Note: Percentages based on a total of 212,182 businesses

that started up in the second quarter of 1998.

As bad as these statistics on business survival are, some industries are worse than others. If you want to stay in business for a long time, you might want to avoid some of these risky industries. Even though your friends think you make the best macaroni and cheese pizza in the world, this doesn’t mean you can succeed as a pizza parlor owner. Opening a restaurant or a bar is one of the riskiest ventures (and, therefore, start-up funding is hard to get). You might also want to avoid the transportation industry. Owning a taxi might appear lucrative until you find out what a taxi license costs. It obviously varies by city, but in New York City the price tag is upward of $400,000. And setting up a shop to sell clothing can be challenging. Your view of “what’s in” may be off, and one bad season can kill your business. The same is true for stores selling communication devices: every mall has one or more cell phone stores so the competition is steep, and business can be very slow (Farrell, 2011).

Businesses fail for any number of reasons, but many experts agree that the vast majority of failures result from some combination of the following problems:

  • Bad business idea. Like any idea, a business idea can be flawed, either in the conception or in the execution. If you tried selling snowblowers in Hawaii, you could count on little competition, but you’d still be doomed to failure.
  • Cash problems. Too many new businesses are underfunded. The owner borrows enough money to set up the business but doesn’t have enough extra cash to operate during the start-up phase, when very little money is coming in but a lot is going out.
  • Managerial inexperience or incompetence. Many new business owners have no experience in running a business; many have limited management skills. Maybe an owner knows how to make or market a product but doesn’t know how to manage people. Maybe an owner can’t attract and keep talented employees. Maybe an owner has poor leadership skills and isn’t willing to plan ahead.
  • Lack of customer focus. A major advantage of a small business is the ability to provide special attention to customers. But some small businesses fail to seize this advantage. Perhaps the owner doesn’t anticipate customers’ needs or keep up with changing markets or the customer-focused practices of competitors.
  • Inability to handle growth. You’d think that a sales increase would be a good thing. Often it is, of course, but sometimes it can be a major problem. When a company grows, the owner’s role changes. He or she needs to delegate work to others and build a business structure that can handle the increase in volume. Some owners don’t make the transition and find themselves overwhelmed. Things don’t get done, customers become unhappy, and expansion actually damages the company.

Help from the SBA

If you had your choice, which cupcake would you pick—vanilla Oreo, tripple chocolate, or latte? In the last few years, cupcake shops are popping up in almost every city. Perhaps the bad economy has put people in the mood for small, relatively inexpensive treats. Whatever the reason, you’re fascinated with the idea of starting a cupcake shop. You have a perfect location, have decided what equipment you need, and have tested dozens of recipes (and eaten lots of cupcakes). You are set to go with one giant exception: you don’t have enough savings to cover your start-up costs. You have made the round of most local banks, but they are all unwilling to give you a loan. So what do you do? Fortunately, there is help available. It is through your local Small Business Administration (SBA), which offers an array of programs to help current and prospective small business owners. The SBA won’t actually loan you the money, but it will increase the liklihood that you will get funding from a local bank by guaranteeing the loan. Here’s how the SBA’s loan guaranty program works: You apply to a bank for financing. A loan officer decides if the bank will loan you the money without an SBA guarantee. If the answer is no (because of some weakness in your application), the bank then decides if it will loan you the money if the SBA guarantees the loan. If the bank decides to do this, you get the money and make payments on the loan. If you default on the loan, the government reimburses the bank for its loss, up to the amount of the SBA guarantee.

In the process of talking with someone at the SBA, you will discover other programs it offers that will help you start your business and manage your organization. For example, to apply for funding you will need a well-written business plan. Once you get the loan and move to the business start-up phase, you will have lots of questions that need to be answered (including setting up a computer system for your company). And you are sure you will need help in a number of areas as you operate your cupcake shop. Fortunately, the SBA can help with all of these management and technical-service tasks.

This assistance is available through a number of channels, including the SBA’s extensive Web site, online courses, and training programs. A full array of individualized services is also available. The Small Business Development Center (SBDC) assists current and prospective small business owners with business problems and provides free training and technical information on all aspects of small business management. These services are available at approximately one thousand locations around the country, many housed at colleges and universities (U.S. Small Business Administration, 2011).

If you need individualized advice from experienced executives, you can get it through the Service Corps of Retired Executives (SCORE). Under the SCORE program, a businessperson needing advice is matched with someone on a team of retired executives who work as volunteers. Together, the SBDC and SCORE help more than a million small businesspersons every year (U.S. Small Business Administration, 2011; SBDC Economic Impact, 2011).

Key Takeaways

  • Business owners face numerous challenges, and the ability to meet them is a major factor in success (or failure). As a business owner, you should do the following:

    1. Know your business. Successful businesspeople are knowledgeable about the industry in which they operate, and they know who their competitors are.
    2. Know the basics of business management. To manage a business, you need to understand the functional areas of business—accounting, finance, management, marketing, and production.
    3. Have the proper attitude. You should believe in what you’re doing and make a strong personal commitment to it.
    4. Get adequate funding. Plan for the long term and work with lenders and investors to ensure that you’ll have sufficient funds to get open, stay open during the start-up phase, and, ultimately, expand.
    5. Manage your money effectively. You need to pay attention to cash flow—money coming in and money going out—and you need to know how to gather the financial information that you require to run your business.
    6. Manage your time efficiently. You must develop time-management skills and learn how to delegate responsibility.
    7. Know how to manage people. You need to develop a positive working relationship with your employees, train them properly, and motivate them to provide quality goods or services.
    8. Satisfy your customers. Commit yourself to satisfying—or even exceeding—customer needs.
    9. Know how to compete. Find your niche in the marketplace, keep an eye on your competitors, and be prepared to react to changes in your business environment.
  • Businesses fail for any number of reasons, but many experts agree that the vast majority of failures result from some combination of the following problems:

    1. Bad business idea. Like any idea, a business idea can be flawed, either in the conception or in the execution.
    2. Cash problems. Too many new businesses are underfunded.
    3. Managerial inexperience or incompetence. Many new business owners have no experience in running a business, and many have limited management skills.
    4. Lack of customer focus. Some owners fail to make the most of a small business’s advantage in providing special attention to customers.
    5. Inability to handle growth. When a company grows, some owners fail to delegate work or to build an organizational structure that can handle increases in volume.
  • Services available to current and prospective small business owners from the SBA include assistance in developing a business plan, starting a business, obtaining financing, and managing an organization.
  • The SBDC (Small Business Development Centers) matches businesspeople needing advice with teams of retired executives who work as volunteers through the SCORE program.

Exercise

(AACSB) Analysis

  1. It’s the same old story: you want to start a small business but don’t have much money. Go to http://entrepreneurs.about.com/cs/businessideas/a/10startupideas.htm and read the article titled “Business Ideas on a Budget.” Identify a few businesses that you can start for $20 or less (that’s right—$20 or less). Select one of these business opportunities that interests you. Why did you select this business? Why does the idea interest you? What would you do to ensure that the business was a success? If you needed assistance starting up or operating your business, where could you find help, and what type of assistance would be available?
  2. Why do some businesses succeed while others fail? Identify three factors that you believe to be the most critical to business success. Why did you select these factors? Identify three factors that you believe to be primarily responsible for business failures, and indicate why you selected these factors.

References

D&B, “D&B—The Challenges of Managing a Small Business,” http://www.dnbexpress.ca/ChallengesSmallBusiness.html (accessed October 30, 2008).

Farrell, M., “Risky Business: 44% of Small Firms Reach Year 4,” Forbes, http://www.msnbc.msn.com/id/16872553/ns/business-forbes_com/t/risky-business-small-firms-reach-year/#.Tl_xVY7CclA (accessed August 31, 2011).

Knaup, A. E., and Merissa C. Piazza, “Business Employment Dynamics Data: Survival and Longevity, II, Monthly Labor Review • September 2007,” Bureau of Labor Statistics, http://www.bls.gov/opub/mlr/2007/09/art1full.pdf, (accessed August 31, 2011).

Knaup, A. E., and Merissa C. Piazza, “Characteristics of Survival: Longevity of Business Establishments in the Business Employment Dynamics Data: Extensions,” Bureau of Labor Statistics, http://www.bls.gov/osmr/pdf/st060040.pdf (accessed August 31, 2011).

SBDC Economic Impact, http://www.score.org/index.html (accessed August 31, 2011).

U.S. Small Business Administration, “Office of Small Business Development Centers: Entrepreneurial Development,” Services, http://www.sba.gov/aboutsba/sbaprograms/sbdc/index.html (accessed August 31, 2011).

U.S. Small Business Administration, SCORE—Counselors to America’s Small Businesses, http://www.score.org/index.html (accessed August 31, 2011).

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