Through hundreds of client engagements at Camino Financial, I have identified common challenges small business owners face in managing their companies. Through an article series titled “Where Small Businesses Get It Wrong”, I plan to shed light on ways entrepreneurs can avoid these common pitfalls.
Where: Complacency with Small Size.
Solution: Think BIGGER
Many small business owners operate a “life-style business.” They perceive their business almost as a paid job. The business pays the bills and covers discretionary spending. In addition, the business owner is reluctant to re-invest earnings into the business in the form of marketing, reporting systems or employees. In fact, of the 28.7 million small businesses, half of them are home based, and 23 million are sole proprietorships (State of Small Business, Mills & McCarthy, 2014). We fully acknowledge every business needs to start somewhere (we started in a graduate school dorm), we strongly encourage small businesses to think BIGGER, especially when the competition is larger and growing.
So what’s wrong with being small? Below are a few points to consider:
Limited Resources to Compete against Larger Players: the smaller the business, the more limited its resources. Large companies find it easier to grow as they invest outside capital and earning into resources, such as employees, technology and marketing, to out-compete smaller players. In addition, it is harder to access debt or other forms of capital when a business is small.
Undiversified: if the business is small, chances are the business is undiversified in terms of geographic reach, customer base and/or product portfolio. The less diversified the business, the more susceptible the business is to binary risk (i.e. the business can disappear with one unforeseen change in operations). What happens if there is a fire at a business’s single store location? What happens if the largest customer leaves? What happens if a core product gets undercut by a competitor?
Limited Benefits from Scale: as a business grows, the stronger the purchase power a business has with its suppliers. In addition, a larger business can leverage its fixed costs and assets to to generate incremental sales that flow to the bottom-line.
Undercapitalized: Small businesses tend to be undercapitalized in the form of technology, equipment, retail space and other assets. Without reinvestment, a business runs higher risk of losing its competitive edge and customers.
The solution is simple, think BIGGER. There are countless of resources available to small business owners to help them think BIGGER. We encourage owners to go to their local small business development center or chamber of commerce. Or, visit a larger competitor and see how a business can do things better. And of course, give us a call at Camino Financial – we are here to help.