Starting a Metro Boston business requires a good business plan and adequate resources. But for many would-be entrepreneurs, the biggest challenge of all isn’t the operational logistics or the financing – it’s the fear. Namely, a fear of business failure.
We’ve all heard the statistics; 50% of new businesses fail during the first 5 years. That number can be higher or lower depending on macroeconomic conditions and the industries involved. But without understanding why businesses fail, this statistic is useless for anything other than spreading fear.
According to researchers at Gallup, common reasons for business failure include:
- Changes in market dynamics and demand
- Breakdown of supply chains
- Regulatory and/or taxation burdens
- Insufficient capital for operations
Insufficient capital is the main driver of business failures. Even a profitable business can have cash flow problems. Knowing the difference between profit, and how your business manages cash flow, can make or break you.
For example, say you have a cleaning service that takes care of the corporate offices of a few large companies. There’s good profit to be made between the low cost of the labor, the cleaning supplies, and what you can charge for the service. But cash flow can still be a problem.
This is because large companies can be infamous for taking their time to pay an invoice. They may take anywhere from 45 to 120 days to pay you. To get their business, you might have eagerly agreed to these terms.
Meanwhile, you may have vendors who are giving you discounts on supplies – but only if you pay in 30 days or less. At the same time, you have employees who must be paid every two weeks. You may also have financing expenses on company vehicles. Not to mention advertising costs, insurance, and other incidentals.
On paper, you’re profitable. In reality, your business is spending money faster than it comes in. You might do some short-term financing to cover the gap, but that can future deteriorate your cash flow.
Business owners who pay attention to their cash flow will quickly realize there’s a problem. Often the first reaction is to cut back expenses. Reduce advertising. Let go of some employees. This slows the bleeding, but it does not heal the wound. It can also impede your service quality, and hamper business growth.
Another option is to seek new business on better terms. Perhaps instead of focusing on large companies, you seek business from smaller companies who offer faster payment. The profit margin on the new business might be lower. But a lower profit margin, with better cash flow, could be healthier for your business long-term. A good mix of client types could be the best answer.
This is a basic example, but it illustrates the value of paying attention to your bottom line, and taking proactive measures to right the ship. Not all situations will be in your control as a business owner. That is part of the challenge and adventure of being an entrepreneur. Rather than fear failure, acknowledge the risks and do your best to mitigate them.
Ready to find your new business location? Use the guidance of an experienced commercial real estate broker at Jay Nuss Realty Group! Whether you are thinking of buying or leasing Boston Metro commercial real estate, we can help you find the ideal property. Please contact us today for your personal consultation!
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