The FINANCIAL — The small four-seater airplane struggled to climb high enough to clear a mountain pass in the Canadian Rockies. My friend Marty sat at the controls. I was sitting in the right seat, watching our right wingtip move ever closer the trees and jagged rocks. When we were so close I could see a squirrel dart down a tree away from the noise of our engine, I asked Marty to move toward the center of the canyon, away from our future crash site.
Marty refused. A few seconds later, he cut the engine power, simulating an engine failure, and teaching me very valuable lesson. As the plane slowed and the granite rocks loomed before us, my heart was pounding. All I could think about was why my good friend was trying to kill us. Marty calmly turned to the left. He made a U-turn in the sky and the airplane glided effortlessly back down the canyon, no engine required.
Marty then taught me about the critical importance of always having an “Out” when flying in the mountains. By hugging the canyon wall to the right, he gave the plane enough room to turn around in an emergency without hitting the other side of the canyon. Flying next to the squirrels when heading up a canyon was the safest place we could have been.
The wisdom of having an “Out” doesn’t just apply to flying small airplanes in the mountains. Project managers like to call them “Contingency Plans”, but whatever you name them, “Outs” are critical to starting your new company. Just like Marty prepared for an engine failure during our flight, you must prepare for the unexpected disaster as you start your business.
The problem with unexpected disasters is that they are unexpected. No new restaurant owner plans for the meat supplier to go out of business during the restaurant’s opening week. No new car wash owner expects the city to tear up the street for repairs during their first month of business. No new taxi driver expects the engine in their car to blow up during their second week in business. The truth is that unexpected disasters happen all of the time. For established businesses, these events are minor annoyances, but they can kill a new business before it even gets going.
This article explores the two most common unexpected disasters that new business will face. Then we will look at four things that you as a small business owner can do to survive the unexpected.
The first disaster comes before you open your doors to customers. It really doesn’t matter what actual event causes the first crisis, the end result is always the same. Unless you are incredibly lucky, building the foundation of your business will cost you more money and take more time than you planned for.
According to the US Small Business Administration, over 90% of new owners underestimate the cost and time it takes to prepare to open. Opening a business is complicated. If you are starting a corner market, you need to rent or buy a space and fill it with shelves and coolers and food. If you are opening an auto repair shop, you need tools and a place to work on cars. Even if you are an accounting professional providing a service you still need a computer, a printer, and a way to advertise your services. It is human nature to underestimate the work and time opening a business takes.
Underestimating the cost and time to open has two negative effects. First, it robs your business of precious reserve capital. Then any delay in opening also delays income from operations.
The second disaster comes after your company is open. Just like before, the root cause can vary by company, but the result is the same: the new company does not make the planned amount of sales. A new restaurant might not have the customers they were expecting. A tomato farmer might be faced with a bad storm that destroyed 30% of his crop. Without capturing the expected amount of sales, companies will struggle to survive, again dipping into cash reserves. Many eventually just close their doors.
There are no statistics in Georgia, but the US Small Business Administration publishes statistics showing that over half of new businesses fail within the first few years of operation. I expect the failure percentage is at least as high in Georgia. When a business runs out of cash, it runs out of options to adjust to customer needs and will probably eventually close.
The good news is that you can dramatically increase your chances of success by following a few simple rules and planning your own business “Outs”.
Rule №1 – Cash is King. Storing a pile of extra, un-used cash is the single best thing you can do to ensure the success of your business. Cash is by far the best “Out” any new business owner can have. Cash allows you to buy more time, change product offering, or even move locations. Having a pile of extra cash gives you the ability to take the lessons and knowledge you gained during your first attempt and give your idea one more try.
Rule №2 – Open a credit line before you start your business. Arrange for this credit even if you are certain you will not need it. Finance companies love to lend money to people who don’t need money because they see the loan as lower risk. If you actually need the credit in the future, you can just draw on the established credit line without having an unpleasant conversation about your struggling business with a cautious banker.
Rule №3 – Live like a pauper today to become wealthy tomorrow. Until your business is firmly established and making solid monthly profits, reduce the amount of money you spend in all areas of your life.
Rule №4 – Get creative and spend less money. Just because you budgeted a particular amount for something does not mean you should not try to spend less money. When Microsoft first started, they could not afford to pay the salaries for the quality of employees Bill wanted. Microsoft got creative and gave away small pieces of the company instead. In 2005, a 26 year old Canadian man, through a series of 15 trades, managed to swap a red paperclip for a two story house (Google “one red paperclip”). Make it a game of trying to get everything your business needs without actually spending money. Use your imagination and stretch every lari as far as it can possibly go.
As a new entrepreneur, you cannot underestimate the value of extra cash. Cash is the best “Out” you and your business can ever have, and it is very often the difference between success and failure for a startup.
The ironic part is that cash is much easier to collect when you don’t actually need it. So before you crash into an unexpected disaster than drains your bank account, relax, think creatively, and build yourself a bigger cash reserve to use an “Out”. Unexpected doesn’t have to mean unprepared.
