Taking the scary out of start-up

One of the most overwhelming aspects of starting a new business, whether it is a nonprofit or a for-profit, is feeling like you're lost in a maze. Once the initial excitement wears off, it can feel like trying to navigate Africa without GPS or even a map.

The solution for that feeling lies in gaining knowledge and experience, but trying to do that completely on your own can be time-consuming, expensive  and just plain scary.

There are tons of resources for would-be entrepreneurs, from the local SCORE office to a myriad of books, podcasts and videos to one-on-one consultants like me.

   

So why do so many startup owners seem to flounder for so long? Why do 70% of all start-ups fail within five years?

I think part of it is because people who start businesses tend to be highly independent folks.

It takes a certain type of person to say "I don't want to exist within the corporate world."  They are quite willing to give up the perks of the corner office to make an impact on their own. They tend to be driven to achieve a goal, sometimes to the point of disregarding anything but the vision of that goal already attained. They are dedicated, but not patient.

As a consultant, one of the first things I do is ask about the basics. Does the enterprise have the structure needed to survive and grow?

Often I find that in the entrepreneurial mind, following rules, i.e. having structure, equates to being suffocated by bureaucracy. I explored that in my previous post "Structure Without Stricture".

Some rules of business exist almost as laws of nature. If you are a for-profit, you have to sell things for more than they cost to produce in order to survive. If you are a non-profit, you have to be able to show a real positive change in a circumstance or condition that provides benefits over the long term to prove your value to donors.

None of that precludes innovation or imagination. You can approach problems with new methods or define a successful outcome with new metrics.

I recently had a client who started his email with "People tell me I am doing everything right. I'm  active on social media, I attend local events, I contribute to local charities and all that stuff. My service is far better than my competitors. But I'm still going broke. Can you help me?"

This person was doing all the soft-skill stuff well. But he missed an important point. The service he was selling cost more to produce than he was selling it for, which he attributed to needing to be competitive.

When I pointed out that being competitive meant staying in the race, he simply didn't understand what I was saying. He had a business strategy problem. He thought that by being the cheapest supplier he was going to get enough market share to become profitable.

To set the stage a little on this, this gentleman had been an employee of a firm providing a service to homeowners. When the business abruptly closed, he started a business doing the same thing.

He knew that his former employer had been charging a certain price that was pretty closely in line with the competition, but he felt that if he sold the same services for just a little more than he had been being paid as a wage by his former employer, he could get more customers and undercut the competition.

That part worked. He rapidly had more business than he could handle, but he still couldn't pay his bills.

The problem was that he had never taken the time or wanted to spend the money to find out how much he truly needed to charge to stay in business. Things like having to pay the employer's share of taxes, or carry liability insurance or the cost of advertising were never considered when he set his rates. When those costs suddenly had to be paid, it took what little profit he was making and then some, forcing him into using his savings to stay in business.

There is a reason why consultants insist on boring exercises like constructing business plans and cash flow projections or developing a marketing strategy.

Just because you are an entrepreneur doesn't mean you should ignore the basics. If you plan well and use the tools developed by others before you, you can take a lot of the scary out of being a start-up. 

Working harder to get government dollars

According to an article on a report published by the Urban Institute, over half of all nonprofits reported lower payments and difficulties with nonprofit/government funding partnerships in a survey conducted in 2013. Some reported that funding simply dried up while the programs were still ongoing.

Considering that government at all levels was funding over 56,000 nonprofits through over 350,000 grants and contracts  and was spending over $137 billion dollars doing so, that has an impact.

Governments don't create wealth themselves. They collect wealth by means of the taxes they collect or the fees they charge, and redistribute it.

Without getting too far off into the political weeds, the simple answer is that there is less money available and the government has never been particularly good at working with the people they give it to at any level. Add in the bad publicity they have created through failed programs and scandal-plagued, sloppy accountability and the money supply is bound to get even tighter.

Governments are not going to stop handing out money. Not only is it the way they garner support (votes) for their initiatives, but they aren't supposed to just sit on the money they receive.

Still, with the national debt still rising, unemployment still a problem, and workers contributing less taxes due to working fewer hours, the money supply is going to get tighter.

The savvy nonprofit will have to tighten up their operations and their belts to get by, and consider diversifying their funding plans. Since late and reduced payments were a problem for many organizations, increasing cash on hand and developing alternate income strategies should be in the forefront of coping strategies.

In the aforementioned report it is noted that nonprofits coped with funding shortfalls by reducing staff, freezing wages or drawing down reserves. It may also behoove them to take a look at reducing the scope of their programs as well. If program and financial reporting can be tightened up to reflect greater oversight and increased effectiveness, now would certainly be the time to implement those new controls.

Basic business and strategic operational planning will be more important than ever in at least  the next decade. Scaling back programs or accessing more foundation and corporate funding may have to figure more prominently in that planning that it has in the past.

If you haven't already done so, consider a re-assessment of your current business and funding plans.  Better to help a little less than go out of business and help no one.

If you need help, either with research or program narratives and reporting, drop me a line at granthelp@ida.net