Business in the United States: Are we coming or are we going?
Did 2020 leave you wondering whether you were coming or going? If so, you aren’t alone.
We had two to three months where life was good, free, healthy, and even optimistic for many of us — and then the pandemic arrived. Air came out of our sails like a deflating balloon, at least for a time. We faced a new health challenge to our bodies and our businesses. These challenges strained our relationships and, in many instances, resulted in profound loss.
Yet, during the pandemic, many of us discovered new things in our lives. Small, skinny beams of light cut through the darkness of 2020. We deepened some of our relationships. We let go of things that weren’t important to us anymore. We tapped into our creativity to work through the challenges and stay connected by whatever means made sense for us. In many ways, we reset our lives.
This is true for the businesses in our community as well. A look at key business data shows two starkly different stories. According to the Local Economic Impact Report published by Yelp in September, approximately 165,000 businesses closed their doors due to the pandemic and nearly 100,000 of those businesses reported that the closures were permanent. Good companies, well-meaning entrepreneurs with aspirations, hopes, and dreams, ran straight into a brick wall that forced them to reassess their lives — business and personal — in a way that led to ultimately closing the doors of their company for good.
According to the Exit Planning Institute, one in every two business owners will be forced to exit the business before they’re ready. 2020 couldn’t be a more harsh or stark example of this. There are multiple reasons for this humbling statistic. Death, disability, divorce, disagreement, and distress, known as the five Ds, results in that 50-50 chance of being forced out of your company on an unintended timetable. The pandemic, with its economic and global public health calamities, all of which are out of a business leader’s sphere of control, is the worst-case scenario of distress. For some businesses, it may have been a double or triple play as they, family members, or co-workers became debilitatingly ill or perished. Unforeseen, personally traumatic circumstances clashed with a lack of preparedness, resulting in forced exits.
On the flip side, according to U.S. Census Bureau Business Formation Statistics, there have been over 3.2 million new business formation applications submitted through Sept. 30, 2020. That is a 27% increase over the first three quarters of 2019. When comparing the “pandemic quarters” on a year-over-year basis, there was a 42% increase in business formations in April through September 2020 vs. 2019. Nearly 725,000 more new businesses were created in Q2 and Q3 2020 than in the same quarters in 2019!
These new entrepreneurs are no different than those who closed their doors. They share a desire and an aspiration to do wonderful things with their companies. They have an entrepreneurial spirit that drives them forward. It’s this spirit that helps all business owners weather the ups and downs and make things happen.
What’s going to be different for these new companies compared to those businesses that foundered this past year? What’s going to give them a greater chance of success and longevity than other companies? If it’s that flip of a coin one way or the other, what are the factors that will place these new companies in a better position to weather the storms inherent in life’s unforeseen circumstances?
I believe there are four elements that determine which businesses remain standing after the darkest days and which have been pummeled to the ground like downed trees in a ferocious summer storm. It has to do with capitalization, understanding what drives profits, creating value that’s transferable, and beginning with the end in mind.
Let’s talk about capitalization first. Capitalization can be straightforward or complex. In its simplest form, your business is “capitalized” to the extent that you have adequate resources on hand to cover your operating expenses for the foreseeable future and be able to honor your debt obligations. When your business is going gangbusters, the capitalization comes from growth, profits, and solid management of a balance sheet. When times are tough, it means having a rainy day fund to carry you through. Regardless of whether you’re on a hot streak or stopped in your tracks, survivors and thrivers know where they stand, employ good business and accounting practices, and maintain access to sources of capital such as savings and borrowing lines of credit.
A common ingredient of the companies that closed their doors in 2020 boils down to a lack of capitalization. They either didn’t have the cash reserves to weather the storm or they decided to take the capital that remained, cut their losses, and move on.
Adequate capitalization in any business is absolutely fundamental and necessary. It is even more important for the new entrepreneur who wants to be able to weather the natural startup roller coaster and market curveballs thrown their way.
Understanding what drives profitability and growing transferable value is a course unto itself. However, effective management of profit boils down to having a keen understanding of how your accounting works, what the actual cost of your product is by the time it gets it into the hands of your customer, and what the most effective pricing strategy is to bring about a robust bottom line.
Too often, businesses don’t have their arms around the current and trending costs of their products. They aren’t clear on how to strike a pricing balance to get the most out of the most desirable orders. These businesses often have erratic profits and operate in the dark, losing their tails without even knowing it. I’ve seen this in action — in turnarounds and other companies that I’ve worked with — where management has no idea if their pricing was right because they lacked current and appropriate costing information. They couldn’t know, with confidence, whether Customer A was a better customer than Customer B, or see that Customer C was sucking the lifeblood out of them.
Creating transferable value
Every business owner who dreams of cashing out of their company at some point with a glistening pot of gold needs to pay attention. When you want to cash out, the business has to be something someone is willing to pay you for. This does not happen automatically. You have to create transferable value by simultaneously and consistently growing, generating profits, and creating a business model that the buyer can envision running at least as well, if not better, than you have for the price and given an acceptable level of risk. Decisions you make every day around profitability, cash flow, growth, and risk impact whether your company will be an attractive, transferable company or not. When business valuations come in at shockingly low or disappointing levels, it’s often because the owner lost sight of one or more of these elements.
Begin with the end in mind
Lastly, “beginning with the end in mind,” the words of Dr. Stephen Covey, ring true when launching and running a business. Certainly, the companies that shut their doors in 2020 didn’t have this in mind. If a company lacks capital, profitability, and transferable value when the zombie apocalypse pandemic strikes, even the most vibrant and clear vision of your end goal won’t make the save.
But, if you are still hanging on or you’re one of those 725,000 new entrepreneurs, knowing what your goals are and having a plan for 2021 and 2022 is not negotiable. Identifying what your long-term business, financial, and personal goals are and envisioning your eventual exit are equally important.
To set your yourself up for short-term and long-term success, you have to set specific goals and commit to them. Hearing the groans, I understand. Having the discipline to sit down and sketch out goals for your business and for your personal and financial life is a taxing process. But so is exercising on a regular basis or healing from a nasty sprain so you can get back to your favorite activity.
Think about what you would like your company to look like when you walk away from it, whether three years or three decades from now. Then look at it with a critical eye in light of that vision, as opposed to running it by the seat of your pants. The exercise provides and instills discipline and accountability for yourself as well as to your team. It gives you direction in terms of what has to happen next to fuel those profits, drive the growth, and create transferable value.
We greet each new year with a sense of optimism, even as we continue through the pandemic. Whether you’re a new or established entrepreneur, I wish you brilliant success in 2021 through strong capitalization, solid profits, and a growing, sustainable path.
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