Thinking about starting your own business? If so, the good news is that almost all small businesses survive their first year of operation, and 70 per cent of them will still be in business after five years, according to Industry Canada.
Those that fail, however, usually flounder due to mismanagement, typically weaknesses in general management, financial management or marketing capabilities. Often these management flaws could have been identified and addressed when the new business was still in the planning stages.
“Take the time to rigorously plan and test your business assumptions and strategies,” advises Chartered Professional Accountant Deborah Rosati, who has both founded her own businesses and invested venture capital in others. “Once your business becomes operational, you can make modifications to your business strategy, but it is very difficult to change the underlying fundamentals.”
Here are some key management issues potential business owners should consider:
- Be sure you are cut out to be an entrepreneur. Everyone likes the idea of being their own boss, but not everyone has the skills or temperament for it. “It takes more than good carpentry skills to run a successful carpentry business,” says Mike Redden, a Chartered Professional Accountant with Good Redden Klosler in Simcoe, Ontario. “As the business owner, you also have to raise capital, market the business, deal with customers and suppliers, collect receivables, hire employees and make sure they show up at the job site, and more. Those are all critical management tasks and they can be very difficult. If you don’t like dealing with things like that, you probably shouldn’t try to manage your own business.”
- Build a team of professional advisers you can rely on. There are a lot of legal, tax, financial and other issues to be addressed when founding a business. “Lawyers, chartered professional accountants and other professional advisers are part of an entrepreneur’s extended management team,” Rosati says. “Entrepreneurs need advisers they can rely on who are committed to the entrepreneur and his or her business.” Rosati recommends interviewing several candidates to discuss their capabilities, experience, costs and the entrepreneur’s expectations for them. “When choosing an adviser, consider everything from their knowledge of your industry and experience with similar business start-ups to the basic personal chemistry and how comfortable you feel working with them. And above all, check their references.”
- Develop a comprehensive business plan. Trying to launch a business without a comprehensive business plan is like starting a journey with no clear idea of where you want to go. A good business plan will address all of the key fundamentals of the business, including its market, key competitors and suppliers, the products or services it will sell, and how it will market itself.The plan will also identify when and where the business will generate cash, and how it will put those funds to use. “A good business plan will identify the critical milestones that the business must achieve if it is to be a success,” says Jim Whetstone, a Chartered Professional Accountant with KPMG Enterprise in Waterloo. “It’s also an important selling document that the entrepreneur will need to attract lenders and other key stakeholders, such as employees. When doing so, if a potential lender sees something in the business plan they don’t like, that should be a red flag to the entrepreneur indicating a weakness that needs to be addressed.”
- Understand the business’s cash needs. Most entrepreneurial businesses are undercapitalized, which is why many of them run into financial management problems, according to Redden. “Entrepreneurs tend to be optimists, which unfortunately means they often underestimate the amount of funding needed to start up a business and the length of time it will take the business to start generating a profit,” he says. “As a result, many entrepreneurial businesses fail simply because they run out of cash.” Redden says a good business plan will include a detailed balance sheet, income statement and cash flow statement that will clearly identify the business’s ongoing cash needs.
- Shop around to obtain the funding the business needs. With a business plan that shows how much money is needed to launch a business and operate it until it begins to generate its own cash flow, entrepreneurs can approach potential lenders, including chartered banks, the Business Development Bank, government incentive programs, venture capitalists, and others. Whetstone advises entrepreneurs to be prepared to shop around and to be proactive in asking about lending alternatives, since most lenders have incentives to promote only the funding programs that offer them the greatest rewards. He also advises lenders to understand the personal guarantees they’ll need to make to obtain their business funding. “Starting up a business isn’t cheap and the risks of failure are high so lenders will want to be assured that the entrepreneur is fully committed to making the business a success. They want the entrepreneur to have skin in the game, which often means the business owner will have to put up their homes or other property as collateral,” Whetstone says.
- Get a shareholders’ agreement if you’re in business with partners. When people are starting an incorporated business in partnership with others, including relatives, the last thing on their minds is the thought of leaving the business. Nevertheless, that day will eventually come, perhaps sooner than expected if an owner’s health fails, interests change, or the owners have a serious falling out. A shareholders’ agreement specifies the terms under which one owner may buy-out another so that both are fairly compensated without causing undue risk to the business itself. “Shareholders’ agreements are best negotiated in advance, when all the owners can discuss the terms coolly and rationally,” Whetstone says. “It is a lot harder to negotiate equitable terms at a time when the partnership is breaking down and emotions take over.” If the business is structured as a partnership rather an incorporated business, the same issues can be covered in a partnership agreement.
© 2015 Chartered Professional Accountants of Ontario