Most small businesses fail within the first couple years. Many of these businesses could have made it if things had been done differently.
Sometimes entrepreneurs or new business owners overspend before the business has any business; they burn through their cash before they have enough coming in to replace what they’re spending.
Often this is seen as undercapitalization, but not every instance of undercapitalization is simply too small of a pile of money; it can be using the money on unnecessary things so that there’s not enough money left for the things that are necessary. It’s an induced undercapitalization.
Other businesses are ideas whose time has not yet come and probably never will. We’ve all seen these pie-in-the sky schemes that seem untethered to reality.
The financial basics of business success can be expressed as a simple equation. The sum of the revenues must be greater than the sum of the expenses. To put it as simply as possible: The money coming into the business has to be more than the expenses.
In the long run, there’s no other option.
You can have periods where there’s more going out than coming in, such as many seasonal businesses during their off seasons, but even those must be net cash-positive over the long term. You can lose a little or you can lose a lot, but you definitely cannot lose indefinitely.
The Revenue Equation
The revenue equation expressed above, that the sum of the revenues has to exceed the sum of the expenses, can be broken down into parts, which will facilitate our digging into their details.
The revenue is going to be from sales of your goods or services. If you put money into the business, it’s capital, not revenue. And most people have a limit on how much capital they can put into their business.
The expenses can be further broken down into two components: fixed and variable.
Fixed expenses are those you need to pay whether you make sales or not. They are generally periodic, things like rent and insurance. Whether you make sales or don’t make sales, the rent payment needs to be paid; it’s a fixed expense.
The way to stay out of trouble with fixed expenses as a new entrepreneur is to avoid all but essential fixed expenses until the business can afford them, and then still be careful taking them on. Caution is necessary to keep the level of fixed expenses low enough to be manageable during down times.
Variable expenses are those that are directly with the production of goods or services that you provide to the customer. If you manufacture widgets, it’s your cost of making widgets. If you provide a service, it’s your cost of providing the service, the time or cost of time to produce the service.
Variable expenses change with your level of production. The price you sell each unit of your goods for must exceed the variable costs and contribute to the fixed costs. And you need to sell enough at whatever price you are charging to cover the total cost. Revenue is the driving factor.
It should become apparent that entrepreneurs need to pay attention to both sides of the equation. They need to manage costs so they don’t spend unnecessarily, and that they obtain or create their output at a cost where they can sell it for a profit, so that they can recoup their fixed and variable costs and then some.
There is some room to reduce costs, but you can’t reduce them below zero, and usually you can’t even reduce them to zero and still be in business.
The revenue side of the equation has no such limitation.
The revenue side of the equation has restrictions by an entrepreneur’s willingness and ability to drive sales.
And many entrepreneurs loathe sales. They love what they do but loathe the idea of being a salesperson.
The Entrepreneur Salesperson
Everyone is a salesperson, but not everyone wants to admit it. Everyone sells themselves or their ideas on a regular basis. It is done formally, such as in a job interview, where you sell yourself to a prospective employer so you get a position. Or it can be done informally, such as when you negotiate where to go to dinner with friends or what to do afterward. Anyone who’s dated or tried to date has been in a sales position. They tried to influence someone else to their point of view. There are no people who are not, at least unknowingly, salespeople some of the time.
And it’s not a natural skill. Not to do it effectively, it’s not.
I have been on hundreds of sales calls with new salespeople. The norm is to overtalk, to spiel away about what they have or can do and how badly their prospect needs it and how much better their lives would be if they would just sign here and pay the money. And it doesn’t work.
It doesn’t work because they have no idea of what the customer needs, or more importantly, what the customer perceives they need.
You can make sales, aka revenue, when you can meet the needs of the customer. And you may know in your heart of hearts that the customer needs what you have. And your spiel will work a small percentage of the time and you will generate business the hard way. You’ll spend lots of time making sales pitches but not much of that time actually making sales.
Sales is a listening skill, not a speaking skill. You make sales via questions, questions designed to get the prospect to tell you what they think their problems are, which is what their needs are — to solve their problems. You find out what they need by listening. If you don’t listen, you don’t know what they need.
You may or may not have a solution to their problem. Either way is okay. If you have a solution to their problem, then you have something to talk about; you can address how your solution is the match for their problem. And if you don’t have a solution, you might recommend someone who does. That’s the right thing to do to be in business and stay in business.
The Bottom Line
You can’t know your prospect’s perception of their problem unless you listen to them. You can make sales the hard way, but it will take a lot more time; time you could be doing the actual work of the business will be a waste talking to people you don’t connect with because you don’t understand their needs.
If you listen, you can fill in the solution in terms of how they perceive the problem, and you have a match; you have a potential way forward. Not everyone will be a sale, but your percentage will be much higher, freeing you to do whatever it is that you went into business to do in the first place.
Everyone is in sales. Every business owner is in sales — and needs to be in sales. Sales drive the revenue that is the cash, which is the lifeblood of the business. If your revenue exceeds your expenses, you have a chance at making it. Embracing your inner salesperson through listening can help you to get there.