Business Thoughts for a Friend

A friend of mine is looking to start a business. I’m meeting him tomorrow for coffee. I’ve been thinking this week about what to say to him as he’s getting started.

A Business is more than a job you’ve made for yourself

Often when people say they want to “start a business” they really mean, without realizing it, “I would like to be a freelancer that markets.” Graphic artists, photographers, writers, and others providing services are probably the most likely to be looking for this type of business. This isn’t a wrong or bad, in fact it can be very good.

The distinction remains important though. Unless the choice, business vs. freelancer, is considered, bigger possibilities may be missed.

My definitions:

  • A business provides value to customers in return for payment.
  • Freelancers get people to pay for a specific set of services they provide.

At first glance they seem pretty similar, but there is a very important difference in focus. The customer has the focus in the first example, the Freelance is the focus in the second.

When a freelancer thinks about their “business” only as providing graphic design, for example, they are limiting themselves to selling this specific service that they know how to do. The focus is on what they can provide, not on what the customer wants. If, instead, the business was defined as “providing communication services for medium sized manufacturing businesses” now a wider range of possibilities will reveal itself. The focus is on the customer and what would bring value to them. The number of potential ways to bring value to that customer are enormous.

It’s also important to note, the definition “A business provides value to customers in return for payment”  doesn’t specify who’s doing the work. As long as the value is delivered, it could be the founder, an employee, or a contractor. A business need not be limited by the skills (or lack) of its founder.

So “business” or freelancer, what’s the right answer for my friend? Neither, it’s up to him. But I’d like him to be aware that it is a choice and it could change the way he looks to build his business.

Why Businesses Fail. Cash flow is king

There seems to be a euphoria that overcomes founders when they startup a business. Success is right around the corner and the money will soon be flowing, they are sure. Sometimes this is true, but too many times this is not the case and spending eats through the foundation of the business.

I ran across a great set of statistics from statisticbrain.com on why businesses fail. They sourced the stats from a University of Tennessee study. It should be required reading for any founder. Learning from others is much easier on the bank account, psyche, and marriage.

Direct from the source, here are the top causes of failure:

  • 46% of failures are caused by “Incompetence.” Specific pitfalls: Emotional Pricing, Living too high for the business, Nonpayment of taxes, No knowledge of pricing, Lack of planning, No knowledge of financing, No experience in record-keeping
  • 30% of failures are caused by “Unbalanced Experience or Lack of Managerial Experience.” Specific pitfalls: Poor credit granting practices, Expansion too rapid, Inadequate borrowing practices
  • 11% of failures are caused by “Lack of Experiences in line of goods or services.” Specific pitfalls: Carry inadequate inventory, No knowledge of suppliers, Wasted advertising budget
  • Only 1% of failures are caused by “Neglect, fraud, or disaster.”

The top failure factor can be reduced at a simmer to: pricing and basic finance. Or even farther, to cash flow. Pricing problems reduce cash coming in (either lost business or reduced margins) and basic finance problems increase cash going out (no budgeting, paying fees, spending too much).

Pricing problems can be solved if the founder understands the value that the business provides (and some marketing knowledge helps as well). Good pricing is a generally triangulation between cost+margin pricing, market-based pricing, and value-based pricing.

Basic Finance problems are most likely due to self-control issues, management issues, and basic accounting competencies.

That’s It!

There are a number of other topics I’d like to talk over with my friend, after hearing about his vision. Topics such as business structure, marketing, business processes, and others. But these two seemed especially important.

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