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The SBC Small Business Newsletter

presented by the Peak Small Business Center



October 19, 2002

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Staff Article

by: Cary Christian

There is data that suggests small businesses get into trouble more frequently than their larger counterparts. This is due, in part, to there being so many more small businesses than large businesses and how easy it is for almost anyone to start their own business.

But if we exclude the small startups that never had a chance to begin with, small businesses are often run far more efficiently than larger ones because talented owners are more involved in day-to-day operations and take more of a personal interest in the way the company is perceived both internally and externally.

When small businesses do get into trouble, the reasons are often very similar from business to business. The failures of larger companies are often highly publicized and other large companies tend to learn from the mistakes of their peers and take corrective action rather quickly. Small businesses are often not privy to the facts and circumstances of the demise of their counterparts, which are usually private organizations, and miss the opportunity to learn from the mistakes of others.

In this three-part article series, I will share with you some of the more prevalent reasons small businesses get into trouble and ultimately fail. In Part 1, we will examine money problems.


1. Undercapitalization.

Undercapitalization is, by far, one of the most common reasons small businesses get into trouble. It is a problem most frequently encountered by those who start their own business without any formalized business or financial training.

Frequently, these businesses are started by entrepreneurs that understand their chosen industry very well, have a good business concept, but lack the training and financial experience to understand how much capital will be required to make their business plan work. As a result, they struggle and never have enough capital to build their business properly. They end up ruining the company's and their own reputations before they ever have a chance to succeed.

This is a problem that is very easily avoided. The key is to hire the services of someone who has the skills the entrepreneur does not have personally, in this case, financial skills. A good CPA or other business consultant can provide the information and analyses to properly identify the level of capitalization required.

Many budding entrepreneurs want to avoid this up front cost, but it is a critical, and often fatal, mistake to do so. The capitalization required must be known before starting any new venture. Period. If it costs something to make this determination, so be it. It is necessary and there are no shortcuts.

2. Cutting the wrong costs.

When money gets tight, costs must be cut somewhere. Too many entrepreneurs resort to becoming tough on all expenditures and wind up cutting back across the board. They fail to realize that the ultimate solution is to increase sales and revenue and that cutting costs is only a temporary measure. Some costs are absolutely necessary to grow the business and cannot be cut.

For example, if you want to increase sales, you cannot cut marketing costs across the board. You can analyze marketing costs and cut those that do not work, (which should be done anyway), but overall spending on marketing should not decrease.

Costs that should be cut are those that represent excess and those that have little or no impact on sales efforts.

3. Resorting to high interest debt.

I've seen small business owners who resort to borrowing up to the credit limit on dozens of credit cards to finance their business. In fact, some acquire 20, 30 or more cards just for the purpose of funding "temporary" cash shortages.

Credit cards aren't the only high interest debt instruments entrepreneurs will resort to either. There are any number of lenders out there who will provide extremely high interest debt to small businesses in trouble.

Very few small businesses can afford to pay 18 to 21 percent interest on borrowed funds. Once this type of borrowing has occurred, the end is usually near and the owner has not only destroyed his business, but his own credit is ruined as well.

4. Inability to honor vendor credit terms.

Vendor credit terms are one of the best financing techniques available to any business. It allows the business to match the payment for goods sold to the receipt of funds from the selling of the goods so the business is never out-of-pocket during the sales cycle.

Consider the flip side, however. If the business has to pay for goods up front and wait possibly 30 to 60 days to complete the sales cycle and receive payment, it becomes very difficult for the business to expand sales. In fact, the business would begin to contract.

For this reason, vendor terms must be honored always. A small business cannot afford to be without this type of financing. Having vendors switch your account to COD is often the first nail in the coffin.

5. Borrowing from the government. Illegally.

Most small businesses in trouble simply cannot resist this one. Taxes withheld from employees and sales taxes collected from customers are not paid when due because there is no one sending dunning letters to collect these taxes. It takes the government longer to become aware of the underpayment or lack of payment, and we all know the squeaky wheel gets the grease. So tax monies are used to pay other expenses.

The entrepreneur must understand that these funds are not theirs! Withheld taxes are trust fund items. Sales taxes are collected as an agent for the state. Use of these funds for other purposes is a crime and will be dealt with severely. The IRS has put many companies out of business over trust fund taxes. States pursue misappropriation of sales taxes as theft, and it usually requires only a small amount of taxes stolen to qualify as a felony ($300 in Florida, for example).

While this type of "loan" is the easiest to obtain, it must never, ever be done.

Next week in Part 2 we are going to look at strategic problems that get small businesses into trouble.

Copyright (c) 2002

Guest Article

By: Wendy Hearn

I awoke to the feeling of being shook and felt scared because I didn't know what was happening. It later transpired that we had experienced an earthquake. As I reflected on this occurrence and my feelings at the time, for me, it was a metaphor for shaking up our lives. What do I mean by shaking up our lives? I mean taking the opportunity to really go for our dreams or to take that leap of faith, that step that feels huge. Most people don't take the opportunity to shake or change their world, or even their own environment, such as work, family or community.

Shaking up your world means taking your own unique ability, strengths and gifts to either change things dramatically or to make progress towards change. The number one reason that I see stopping people from doing this is that they are unaware that they personally have so much more to offer. There are also the people who at times have fleeting thoughts of their brilliance, but they let these thoughts pass without belief or action, probably due to fear.

I believe that you as an individual possess much more than you ever tap into. This may be in the form of wisdom, skills, beliefs, strengths, intuition, ability, and gifts. A whole unique combination of all these things belongs to each of you as individuals. It may seem easier to play small in the world and not to look at your unique and true potential. However, by doing this, what are you and others missing out on?

Just as the earthquake was scary for me in the feeling of being shook, it can feel very scary to consider what you have, that potentially could add to or shake up your life and possibly others around you. Fear is a major factor that holds people back from going for many things. Thank the fearful part of you for being there, become its friend and embrace it on your journey, rather than be stopped by it. If rather than being stopped by fear, you took it by the hand and led it forward, what could you offer out to the world? Perhaps you're someone who works in a corporate company and has some insight into improving communication, employee retention or leadership development. Possibly you run your own business and sense that there is a more innovative way of offering your product or service. Maybe you're an individual who wants to build a stronger community that you live in or have ideas on helping
drug-addicts or single mothers.

Although it may feel scary to consider what you have to offer, it can also be very exciting. I believe that you do have a sense of your magnificence, even if it's buried very deeply. Perhaps you just haven't given it an opportunity to be unlocked and to shine brightly. You can unlock this at your own pace and this usually requires you stepping out of your comfort zone. Although when you first step out of your comfort zone it may feel difficult and fearful, you will at some point become comfortable again. The first step out of your comfort zone is to start the process of seeing clearly what you have to offer that may potentially shake the world. Whether you have much of an idea of what it is or not, start by committing your thoughts to paper.

This allows you to see it clearer as it is today, and the opportunity to add to it and explore it more. Exploring it more involves considering the following:

What are your ideas?
What are you really good at?
What do you want to change?
Your values.
What's important to you?

At this stage you may not know how you're going to go about using your unique abilities and that's okay. Continue to write about them, dream about them and allow yourself to get really excited about them. When your enthusiasm and inspiration is increased dramatically, you will find that you naturally know what needs to be done. Your excitement and inspiration is infectious to people around you, even if they don't know of your idea. This often draws the right people and opportunities to you.

What I want for you is to stop playing small and discover what your unique brilliance is.


Wendy Hearn
Personal and Professional Coach

She works with business owners, professionals and executives to
discover and unlock their own inspiration, to effortlessly take
the actions required to have the success they desire.
To receive Wendy's free newsletter, send an email to:

Copyright 2002, Wendy Hearn. All rights reserved.

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