Entrepreneurs and the 'Desperation Factor'
Desperate decisions occur when entrepreneurs have to make choices about business and/or personal actions with insufficient available funds. This precarious financial status can lead to decisions as desperate as not paying vendors for services or products or accepting deposits and not delivering services or products to customers.
What are some of the causes of this desperation?
* Underfunding of the business
In planning for the start and operation of your business, it is necessary to consider your personal financial needs - the mortgage, car payment, tuition, and so on – as well as the needs of the business. You must have a plan to sustain you personally while the business is established and growing. Having a plan to handle personal needs will reduce the "desperation" factor when business doesn't go as planned.
Once the business is started, lines need to be drawn between the personal factors and the business factors used to make decisions. Many businesses succumb to the effects of cash withdrawals by the owners. Owners often fail to recognize the need to continue "investment" in the business during the first few years. Large salaries and "image" expenditures erode the business successes.
A real life example is a company which invested in marketing - public relations, advertising, and website development - to improve visibility and build the "brand". After investing a significant amount of funds on a public relations campaign, sponsorships, advertising in major publications, and a knock-your-socks-off marvel of technology and bells-and-whistles website, the company experienced a phenomenal increase in prospect contacts - website hits, phone calls, and walk-ins. With new prospects contacting them every day, this company STOPPED all marketing activity.
The revenues were coming in and the owners felt they had arrived. The money spent on marketing was shifted to new offices, office furniture, and cash in the owners' pockets. Six months later business began to slow as the projects were completed. No new prospects were coming in the door, the phone had grown silent, the website looked the same, and the "brand" had faded. They hadn't sustained the momentum developed in the market. They failed to reinvest even part of the success in the business.
The owners’ decisions with regard to the business were made based on personal perspectives. They felt that they had sacrificed and sweated long enough and that the payoff had arrived. They didn't consider the need to make sure the company could sustain the success.
They didn't understand that business success isn't the result of a single act or campaign, but the result of a series of successes and campaigns which must be supported and sustained at some level. That level depends upon the nature of the business and the targeted results. Their reality was that some level of marketing activity needed to continue to "maintain" the "brand" and visibility. Without maintenance expenditures on strategic and tactical activities, the original investment in marketing doesn't payoff.
Another major factor in business success is separating the business from the personal. Make decisions based on what is best for the business first, then address how they impact the personal – the entrepreneur's financial position.
Many entrepreneurs maintain the view that they are the business and what is good for the owner is good for the business. Often the opposite is true, especially in start-ups and early stage companies when cash is king. Every dollar the business brings in is most often “best” used as further investment in the business.
What does this mean to the business owner? It usually means sacrificing a steady paycheck (or any paycheck) in order to establish, stabilize, and grow the business into a sustainable, viable commercial entity.
When individuals make the decision to start a business and estimates the amount of money needed to start the business, they often look at only the resources needed to invest in the setup and running of the business initially. They fail to consider and capture the financial demands from the personal side - if it takes three years for the business to hit breakeven, positive cash flow, and/or profitability, then what will the business owner live on? The living expenses for the owners must be included when determining the amount of financial resources the owner(s) need to start and grow the business while keeping hearth and home in tact.
The more intense the pressure on personal financial issues, the lower the critical decision-making ability seems to go. The business has an opportunity to reach an important market segment and get in front of potential buyers. It costs $2000 to do that - marketing materials, travel costs, and so on. On the personal side, the kids want to go on a school trip with their friends or some other personal “need” arises at the same time. Often entrepreneurs use that money for the personal need because it is more visible or has greater pain associated with saying no.
Entrepreneurs need to understand that in order to establish and grow a successful business, these difficult steps are required:
1. Determining what resources are needed to satisfy the business needs
Success requires that the personal needs of the entrepreneur are subordinated to the needs of the business in the decision-making process. Once a business decision is reached, then the impact personally on the entrepreneur is evaluated. For instance:
* Are there sufficient resources for funds to be allocated to the entrepreneur?
For many businesses personal assets are pledged as security for business loans, regardless of the type of legal entity. In addition, entrepreneurs also use their personal credit cards to make purchases of supplies and assets for the business. This increased connection further blurs the distinction between the owner/entrepreneur and the business.
Doing the following will minimize the "desperate" decision process:
* Plan for personal as well as business financial needs
The best way to avoid "desperate" decisions is to have a plan and be aware of the issues. The plan must include timing and risks.
For more on how to plan for your own business before you stop working for someone else, pick up Out of the Cubicle and Into Business: 114 Questions to Answer Before You Make the Move from a Corporation or University Job Into Your Own Business! (ISBN 1-4208-3103-5) available from AuthorHouse.com, Amazon.com, and BN.com or your local bookstore.
Lea A. Strickland, MBA CMA CFM CBM, nationally recognized expert on entrepreneurial and strategic business issues, is President/CEO of F.O.C.U.S. Resources a strategic business consulting firm. Ms. Strickland has published over 400 articles and provided expert commentary to national and regional media including: Entrepreneur Magazine, Entrepreneur Magazine Radio, Small Business Technology Magazine, CarolinaNewswire.com, LocalTechWire.com, BusinessAdvisorOnline.com, NC Journal for Women. She is the author of Out of the Cubicle and Into Business (2005) and SBIR Basics: The Numbers (2007), and coauthor of Marketing Strategies (2007) and One Great Idea (2007) and is the publisher of three newsletters: “F.O.C.U.S. on Business”, “F.O.C.U.S. on Commercialization”, and “F.O.C.U.S. on SBIR Recipients”. Her website is www.focusresourcesinc.com. To talk with Ms. Strickland for consulting services, workshops, or speaking engagements e-mail to firstname.lastname@example.org or call 919.234.3960.
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