February 14th, 2015 Read in 4 minutes
Where Do Small Businesses Get It Wrong? (Series 1 of 2)
I have worked through hundreds of client engagements at Camino Financial. Along this process, I have found common challenges small business owners face. Inspired to provide solutions to these challenges, I began these series of articles.
Complacency with Small Size
Solution: Think BIGGER
Many small business owners operate a “lifestyle business.” They perceive their business almost as a paid job. They see the business as a way to pay the bills and cover discretionary spending. Also, the owner is reluctant to re-invest their earnings into the business in any form. For example, marketing, reporting systems or employees.
Every business has to start somewhere. Out of the 28.7 million small businesses in the United States, half of them are home-based. Around 23 million are sole proprietorships (State of Small Business, Mills & McCarthy, 2014). In fact, our business, Camino Financial, started in a graduate school dorm. We encourage small businesses to think BIGGER. Especially when the competition is larger and growing.
So what’s wrong with being small?
Limited Resources to Compete Against Larger Players
The smaller the business, the more limited their resources. It is also harder for them to access debt or other forms of capital. Large companies find it easier to grow as they invest in resources. Such resources could be employees, technology, and marketing. This helps them out-compete smaller players.
If the business is small, chances are the business is not diverse. We are thinking about geographic reach, customer base, and/or product portfolio. Being less diverse makes a business susceptible to binary risk. This means that 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
The more a business grows, the stronger the purchase-power it has with its suppliers. Besides, a larger business can leverage its fixed costs and assets. This will help them generate incremental sales that flow to the bottom-line.
Small businesses tend to be under-capitalized in the form of technology, equipment, retail space, and other assets. Without reinvestment, a business runs a 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 like you to help them think BIGGER. We encourage you to go to your local small business development center or Chamber of Commerce. Or, visit a larger competitor and see how a business can do things better.