The #1 Reason Small Businesses Fail To Really Grow
According to the U.S. Bureau of Labor Statistics, 50% of all businesses fail within the first five years and 66% fail within the first 10 years. But perhaps worse than that, of those that do survive, most FAIL to really thrive. Most fail to scale up, have consistently excellent revenue growth, beat industry average profit margins, and give the owner more freedom. Most business owners feel that the company owns them instead of them owning the company. Why does this happen? Better yet, why does that ALMOST ALWAYS happen?
Certainly you have talked to business owners with this story. Here are common refrains. "We are just getting by." "It's tough out there - a real jungle." "Its hard to get good people. If I could only get good people." "One of these days I'll get some freedom from this place."
These are not the comments of the owner of a thriving business. These are the comments of someone who has bought a job, and it owns them! But I promise you, there is a better way - a proven path that successful businesses have taken.
At the end of this article I will give you a free tool to help you start the process of scaling up your business.
As I survey small businesses, I see one common thread amongst those who struggle to thrive, and a different commonality among those who thrive. While there are many steps necessary to building a great company (e.g. impactful culture, strategy, healthy leadership, etc.), there is one core principle that must be grasped above all else. And here it is:
Instead of working "in the business", the owner must create a scalable operation by working "on the business."
Now I know what you are thinking. This is old news - work on my business not in my business. Well, yes and no. It is old news in the sense that this adage has been around for some time. But don't let its age fool you into thinking it is outdated. However, this principle is new in that the focus of the owner is on creating a "scalable operation." So let's break this down into three stages using a fictional story.
Stage 1 - Working in the business (The E-myth)
Jeff has been working as a project manager for a large construction company. He put together estimates, helped sell projects, and oversaw the construction process. Driven by dreams of personal and financial freedom, he steps out to start his own construction company. He knows the business and thinks he can create a successful company. He sets to work doing what he knows best, bidding work and managing it. On top of that, he must handle the finances, administration, and everything else needed to keep the doors open. Jeff, however, has fallen prey to what Michael Gerber famously described as the E-Myth. Jeff thinks that his success as a project manager will translate to success in running his new business. However, despite being in the construction industry (an industry he knows well), the skills needed to succeed as a project manager are different than the skills needed to run a successful company. As the old adage goes, "what got you here won't get you there."
Jeff has bought a job, and at times he wonders why in the world he went out on his own. Not only is he now working longer hours, but he feels the full weight of the stress of owning and running the business. For Jeff to gain a sense of freedom and for the business to have the chance of truly succeeding, Jeff must move to stage 2, working on the business. The business must take on a life of its own.
Stage 2 - Working on the business (The Real Business Owner)
For the business to produce more than is a result of Jeff's direct efforts, it must begin to take on a life of its own. What does this mean? The business must be set up such that it begins to operate without the direct effort of its owner. The cliche phrase often used for this concept is working on the business, not in the business. Systems and processes must be put in place that give employees direction. You are not creating robots, but creating a framework within which your team members will operate. They have freedom within boundaries, aimed at certain objectives.
To use an example, Jeff may develop a system for handling the human resources and administrative functions of the business. Hiring and onboarding is done in a very specific way. Phone calls are answered with consistency. Inventory is tracked in a specific way at regularly defined intervals. Jeff then hires an individual to carry out this clearly defined process. This portion of the company soon begins to run smoothly without the regular and direct involvement of Jeff. A system has been designed and a competent individual is owning and managing that system. Jeff then creates a similar system for the financial aspect of the business, then project management, sales, etc. Just like the systems of a car must all function properly for the car to run without the owner pushing it, so too must the various functions of the business operate independently yet aimed toward a common goal.
Stage 3 - Creating a scalable operation (The True CEO)
Most people see a successful implementation of stage 2 to be a great success. And to be fair, it is a great achievement. Few businesses get this far. But most entrepreneurs are not satisfied with this level of success. The motivation goes beyond a sustainable business – they want a great business that can perpetually grow, create more freedom, more jobs, more money, and more impact. To put it shortly, they want to scale up! This is tangentially related to Jim Collin’s famous concept of going from Good to Great. Just as going from Stage 1 to Stage 2 takes a certain mindset, going from Stage 2 to Stage 3 (the scaling up phase) takes a unique mindset and set of actions from the owner. So what does this look like?
In Stage 2, the focus was on creating standard systems that people could carry out, slowly freeing the owner from “handling” every aspect of the business. Stage three imagines what a scaled up company would look like, then focuses on the critical areas that will make this vision a success. These include:
A specific company culture built around a core purpose and set of values.
A strategy that guides the growth and operational decisions of the business.
A scalable infrastructure (i.e. the standard processes are designed to be scalable)
A dedication to hiring high level leaders combined with position profiles and compensation plans to inspire growth and company success.
A plan for financial controls that places the health of the company over other priorities.
To go back to our example, Jeff must communicate the culture of the firm and ensure that it is known, believed, and not lost during growth. He must develop or refine the strategy of the company to ensure the long-term focus of the company does not suffer at the expense of the allure of growth. A dedication to a certain service offering made them successful, and this hard-core focus is the only thing that will ensure success in the long run. Chasing growth for growth’s sake is certain to dilute the value of Jeff’s company and doom them to mediocrity at best, failure at worst.
Jeff must also plan for operational systems and procedures that allow his company to operate successfully in any geography they desire to work in. They need systems that will scale from $1M to $20M, 1 office to 5. Fourth, he must swallow his pride and hire leaders who are the best, dare I say better than Jeff himself. A great leader must be humble enough to realize he needs men and women more talented than himself to scale up the business. Finally, Jeff must develop financial controls that are radically aimed at the long-term health of the business. Better cash flow, less risk, and well-compensated (thriving) employees are key to growth and sustained success.
So let me leave you with this. I want give you a tool that will help you begin to think through these 5 critical areas necessary to scaling up your business. It is a tool I have created to give you specific steps to begin scaling up your business. It will walk you through each of the 5 areas and help you ask the necessary questions to start you on the journey of scaling up. So dive in and get to work. Opportunity awaits!