Three principles for businesses
One of the stats people love to quote is how many businesses go under in their first year. A quick Google search of how many businesses fail in the first year in New Zealand brought up some predictably gloomy stats across multiple sources over the past decade:
“According to MBIE, 58 per cent of Kiwi businesses born in 2010, with no employees, ceased to exist by 2015. With up to five employees the figure was slightly better at 43 per cent.” — NZ Business
“96 per cent of small businesses fail in the first two years.” — The Spinoff
“Around 45,000 [businesses] start in New Zealand yearly but about the same disappear. So while the number of businesses that officially fall into liquidation is relatively small relative to start-ups, most simply give up and disappear for reasons only the owners will know.” — Bob Weir in Why Businesses Fail
I was recently asked to list three essential elements of staying in business, particularly with small to medium enterprises in mind.
This presented a challenge as there are many key elements.
These three are non-negotiable. You must make a profit. Too many businesses operate without understanding the basic principle that if you are in business you must make a profit (even a charity needs to ensure it is not running at a loss).
At the severe risk of being overly generalistic, a sweeping rule of thumb is that a 40 per cent profit will allow you to grow and manage growing pains (like cashflow); 30 per cent will still allow growth but you will tend to always be struggling with elements like cashflow, paying competitive wages, etc, and at 20 per cent you risk falling into paying hobby category. (All this said, high-volume businesses like grocery stores can run at as low as 7 per cent gross profit due to multiple factors like delayed payments, strong cash-positive business models, etc.)
You must have cash flow. This rule applies irrespective of how large your organisation is. IBM almost infamously fell victim to not managing this well. Cash is king. Without cash, you can have the best gross profit in the world but if people take too long to pay you it will mean you cannot pay your staff and suppliers — a recipe for disaster!
You must pay yourself. Too many businesses operate on the charity of the owners who can go for years without paying themselves. If this is you — do yourself a favour and read the book Profit First by Mike Michalowicz — the simple principle of “make the first ‘bill’ you pay be the profit” can radically change your mindset to ensure you run your business like a business.