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Local Business  » Are Hidden Flaws in Your Business Preventing Your Success?

Are Hidden Flaws in Your Business Preventing Your Success?

Ah, the joys of self employment...Good pay, flexible hours,

excellent benefits, a wise and business savvy boss...And

profitability, lots of profitability! If you're self employed,

chances are your own company is missing some of the features

that you might consider to be ideal. It's a good thing being a

business owner can have other benefits that are not as

quantifiable. Things like satisfaction, loving what you do, not

dancing to someone else's tune and charting your own course. But

no matter how satisfying self employment is, the truth of the

matter is this. If your business is to be sustainable, it has to

sustain you financially in a way that makes you feel all the

trials and tribulations of business ownership are worth the trip.

For one of my consulting clients, that trip has gradually become

less and less sustainable and sustaining. They grew tired of the

constant battle, the struggle to create enough cash flow to make

payroll every week, and the toll the lack of cash was taking on

their own lives. They made the difficult decision to sell their

business and go back to work for someone else. In the end, the

business did not work in one very important way. Their personal

financial needs were not being met. For them, that was an

insurmountable challenge.

When I spoke of my clients' difficulties involving the constant

struggle to make payroll and have enough left over to pay

themselves, you may think the underlying problem is cash flow.

But poor cash flow is only a symptom. The underlying problem is

generally a business model that is not well thought out or well

executed.

Before you get hung up on the phrase "business model", let me

tell you what it means in real world small business terms. Your

business model is basically what you do and how you get paid to

do it. For an example, let's look at eBay. eBay's basic model is

that it makes money by serving as a go between bringing buyers

and sellers together. In exchange for providing the meeting

ground and facilitating the sale, eBay receives fees. It isn't a

complicated business model at its core, the difficulty is in

executing the model in a way that satisfies customers and makes

a profit for eBay at the same time. If the customers are

unhappy, the model fails. If eBay can't operate at a profit, the

model fails.

The second half of that equation is where my clients ran into

problems. They provide a valuable service to a growing market

but providing the service carries a high payroll and a high rate

of liability and workers compensation insurances. For every

dollar in sales, they pay out about 65 cents in payroll and

insurance. That leaves 35 cents of every dollar for rent,

utilities, telephone, marketing, advertising, etc. Trying to

wring out enough money for the owners to get paid a living wage

was usually impossible.

The owners were able to keep their heads firmly buried in the

sand for only so long. We sat down one day and had a very in

depth conversation about what the business could potentially

produce for income for the owners in the short and long term. We

weighed all the benefits, the costs, and the risks. The bottom

line was that the business could not realistically support the

owners in a way that would allow them to support their families

in even a modest way.

Normally, this type of a hard look at a business reveals any

number of opportunities for improving the business. In this

case, it simply was not possible to make the changes necessary

to make things work better for all involved. Let's explore why...

My client's were first time business owners. They are both

professionals with years of experience in their own fields who

both found themselves laid off by their respective companies.

They knew each other through church and had been friends for

some time. Working with agencies set in place to help them find

new work, they were introduced to a program set up to help

displaced workers start their own businesses. The program

provided advice, resources, and structure for new business

owners.

The friends decided to explore opening a business as partners.

They began exploring different businesses and were drawn to

franchising because of the remarkably high percentage of success

for franchise outfits. Their interest in franchises led them to

investigate a local operation that was selling franchises. The

franchiser was new to the franchising business and had sold only

one franchise to an employee so the model was largely untested.

The franchiser led the partners to believe that all was rosy

with the original business that spawned the franchising.

Although the potential business owners didn't know it at the

time, this was not the case. The original business and the first

franchise were actually operating at a deficit and were being

propped up by continued investments of personal funds by the

owners. The original owner was far more interested in selling

franchises than in giving a realistic view of expected results.

The business model had some flaws that made it difficult to do

well in this business even though the service was a very

valuable one to the target market.

Flaw #1--Slim Margins make Slim Pickin's.

As I mentioned before, every dollar in sales cost 65 cents in

payroll and insurances. An additional 3-7% (depending on the

price structure they chose in buying the franchise) went for

royalties. Once you subtract out rent, utilities, office

supplies, and so forth, there was little if any left over for

advertising and marketing. And the owners were left without a

paycheck most weeks.

Flaw #2--Built in Cash Flow Issues.

Employees were paid every two weeks for work performed.

Customers were billed every two weeks for services already

rendered. So the cash leaves the bank account before it is

received. Naturally the customers often took 30 days to pay so

the cash flow for every transaction ran as much as six weeks

behind the expenditure for payroll for the work performed.

Flaw #3--Pricing Inflexibility.

Franchisees could not lower or increase their pricing based on

the market they were serving. In the State of Maine, where this

business is headquartered (and this is true of most areas of our

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country), there is a wide disparity of resources. The southern

part of the state has higher income levels than the northern

part of the state. The seacoast tends to have higher income

levels than the western mountains. Depending on where your

franchise is located you could find yourself priced out of the

market.

Flaw #4--No Name Recognition.

When you think fast food, you think McDonald's. When you think

McDonald's you picture the golden arches. You have an

expectation of what you will get--the restaurant will look a

certain way, the food will be universally awful. You know

exactly what to expect. The same is true of every other

successful franchise--Dunkin' Donuts, Olive Garden, Hardee's,

H&R Block, etc. With the business my clients entered, there were

no strongly defined franchises so the expectation had not yet

been created. This means they had to explain what the business

was all about. It wasn't a case of being able to say, "I own an

H&R Block franchise" and everyone knows what you are talking

about. This makes it an uphill battle.

Flaw #5--No Strong Marketing Program to Build Name Recognition.

Part of the responsibility of the franchiser organization is to

do the legwork to build name recognition. The franchiser did

some local advertising through events and radio advertisements

which was a good start. I have to say, though, that if I am

going to consider buying a franchise I want to see some serious

commitment to building name recognition before I sign on the

dotted line. When you mention the name of the franchise, I want

to be able to immediately know exactly what you are talking

about. That kind of familiarity takes a very concerted, and

usually expensive, effort on the part of the franchiser.

Flaw #6--Where Are My Step by Step Business Building Techniques?

The glory of a franchise is that for any task or challenge I can

simply flip open the operations manual and see step by step

exactly what to do. With this franchise, the most important

piece was missing...How do I build the business? What specific

steps do I take to create buzz before the grand opening? What

steps do I take to attract the attention of my target market?

How do I get the business to a point where I can make a living?

In addressing these issues with the franchiser, it became

increasingly apparent to my clients that their grand dream of

making minimum wage for themselves was far off in the distant

(and very uncertain) future, hence their decision to sell.

Regardless of whether your business is a franchise or a stand

alone entity, hidden flaws in your business model can create any

number of obstacles and pitfalls for your business. A carefully

thought out and well executed business model is a critical

success factor for every business large or small. By rooting out

the flaws in your business model, you increase your odds for

building a business that is both sustainable and sustaining.

About the author:

Caroline Jordan, MBA helps self employed professionals build

successful businesses, attract clients they enjoy working with,

improve cash flow, and develop additional sources of revenue. To

find out how visit: http://www.TheJordanResult.com