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How to build a successful business
Starting a new business is an exciting and rewarding venture, but there are also several risks to entrepreneurship. Of the 500,000 new businesses started each month, only 50% see success by the five-year mark. So, how can you succeed as a small business owner? Unfortunately, there is no direct path to overcoming all obstacles, but there are some steps every entrepreneur can take to increase their chances of success.
Determine your business goals
Successful business models begin with clear intentions and defined business goals. Why did you start this business? Was it to achieve freedom, to follow a passion, or simply to earn a better living? These will provide your driving motivation when you face trials.
Whether you have an innovative business idea, or you’re buying into a franchise, typically, you’ll also have goals linked to achieving growth, profit, and control.
For small businesses where growth is the primary objective, the short-term goals generally include a consistent increase in the financial value of the company. You may see evidence of the success of your own business through increasing annual revenues, the need for additional locations, or reaching more members of the community
For small businesses where profit is the goal, the business’s success is often measured in liquidity. Liquidity makes it possible for the small business owner to pull cash out of the business to fund their lifestyle, expand philanthropic efforts, or purchase investments. If the business owner is seeking both liquidity and control, they may consider going public to fund growth or seek out investors or business financing options.
Entrepreneurs that set out to be their own boss and maintain control can measure the company’s success by the decision-making power the business gives them. Control can be a driver for success in the shape of building long-term wealth and independence or creating a business to stay in the family for multiple generations. Some entrepreneurs may have a combined goal of growth and control which means they want the company to grow in terms of size and net income but want to maintain control over operations and financial planning.
Write a strong business plan
Once you’ve established your goals for the future of the business, you’ll want to create a strong business plan. A solid business plan will act as a guideline for financial planning and decision-making throughout the life of the business. It’s also a requirement when applying for a small business loan or government grant funding. Business plans are typically written when a company is in its infant stages and reviewed and revised annually.
A business plan typically includes each of the following elements:
- Executive summary – Gives the value proposition of the business.
- Company overview – An outline of the operations and business owner’s qualifications.
- Market analysis – Details about the industry you will enter and the major competition already operating.
- Business organization – Shares the business structure (partnership, LLC, or corporation) of the organization and lists key members of the management team.
- Products and services – Details about how the business will earn money.
- Marketing strategy – Discusses the advertising budget, target customers, and plans to build a customer base.
- Financial plan – Shares details about financing the business and gives a financial projection of the business for the next two to five years.
Business success metrics
It’s not enough to just create a plan, you need to actually measure things to make sure you’re making progress. There are countless key performance indicators (KPIs) that you can use to track progress within your organization. Not every success metric or KPI applies to every type of business, so it’s important to find performance measures that can easily be calculated and applied to your specific business model.
Metrics that indicate financial health are typically calculated using data retrieved from financial statements, like the balance sheet and income statement. Financial metrics can be evaluated regularly with monthly or quarterly financial reports.
- Gross profit margin – Measures the financial health of the company by looking at profitability. The gross profit margin is calculated by subtracting the cost of goods sold from net sales. Any profit measured indicates that the business is making more than it is costing.
- Revenue growth rate – Compares current revenues to prior periods. The revenue growth rate is found by subtracting the current period’s revenues from the same period last year’s revenues and dividing that difference by the prior period’s value. A positive percentage indicates a successful business.
- Debt-to-income (DTI) – The DTI calculator helps small business owners and lenders understand how much of the business’s revenue is being used for debt payments on loans, lines of credit, and other financial liabilities.
Continuously evaluating the customer experience of your business is another way to measure success. Whether you’re running a local restaurant, an online e-commerce store, or offering consulting services from your home office, customer satisfaction can make or break a business.
- Customer retention rate – Customer retention measures what percent of your revenues are earned because of return customers. Repeat business indicates a successful business model, so if you are not seeing a high percentage of repeat customers, consider examining your customer service procedures and ensuring your products and services are high-quality.
- Net promoter score (NPS) – Sometimes called a satisfaction score, the NPS measures customer loyalty. The NPS is found by asking customers to rate their level of satisfaction on a scale of 1-10. Customer scores can be averaged over predetermined periods to measure the consistency of service.
- Number of referrals/positive reviews – Are you getting positive reviews on Google, Yelp, Facebook, and other review-based sites? If so, you’re on your way to success. If not, you need to figure out why and take action to change this.
Human resource metrics
In some business models, employees are the key to success. If your small business has any staff members, you can use employee-driven performance metrics to measure success.
- Employee retention rate – Calculated in a similar fashion to the customer retention rate, the employee retention rate measures how long your team members stick around and whether they’d recommend an open position to a friend. Successful companies tend to have high employee retention rates because of a positive company culture.
- Employee satisfaction – Just like the NPS, employee satisfaction can be determined by asking staff members to rate their experience working for the company. Scores can be solicited during annual reviews, exit interviews, or during prescheduled HR check-ins.
If your goals include making an impact by serving your community, being able to give more to your favorite charity, or running a carbon neutral organization, then your metrics may be tied to impact. For example:
- Sustainability/ESG – Are you running a green, carbon neutral business? How are you getting rid of dead inventory? How is your business impacting stakeholders in your community, and not just your shareholders?
- Percentage given to causes – Are you donating money to charity? What percentage of profits or revenue are you giving each year, and how have you integrated your passion for doing good into your core business model? The most successful impact-driven companies have their passion for causes embedded in every aspect of their operations.
What to do if your business is not working
If the metrics used to measure your business’s success are not showing favorable results, you may be wondering if your new business is going to fail. Some signs to watch for to indicate an unsuccessful business model include:
- Not having enough cash in the bank to cover operating expenses.
- Unpaid invoices are getting out of hand because customers are not paying on time or not paying at all.
- You don’t know how to analyze the financial position of the business.
- Every decision appears urgent, like when inventory hasn’t been ordered in time.
- You see a decreasing number of customers and sales for a period greater than 60 days.
If you think your business might be failing, there is a tough decision to be made. Consider your options and the likely outcome of increasing your efforts to get back on track or deciding to cut your losses and close the doors.
Get back on track
If you’re not ready to throw in the towel, there are some strategies you can implement to change the direction of the business. Consider making the following changes:
- Increase marketing efforts – If sales are decreasing or just never picked up enough for the business to turn a profit, consider increasing your marketing efforts. Some cost-effective ways to advertise include email marketing, building a presence on social media, and hosting customer appreciation events.
- Review products and pricing – Go back to the business plan. If you are offering quality products or services at reasonable prices, there may be room to add to your product line or services. Review customer requests and the goods and services sold at your competitors’ businesses to brainstorm on ways to improve your product lines.
- Optimize your strategy – Often companies are trying to do too many things at once, when what they really need to do is focus. Every employee in your company should know exactly why their day-to-day tasks are important for the success of your company. If they don’t, your strategy isn’t clear enough.
- Secure capital – If cash flow is your main concern, consider taking out a small business loan to increase working capital until you are turning a profit. Some great financing options include a Merchant Cash Advance, where you can borrow funds to repay with future sales, or a business line of credit, where you have access to the cash you need fast.
Cut your losses
If you’ve decided that you can’t save your small business, it may be time to cut your losses. If you decide to close your business, follow the following steps to make the transaction as smooth as possible.
- Plan a date to close the business, being sure to consult investors and partners.
- Notify employees and key customers.
- Collect or sell your accounts receivable balances
- Liquidate business assets
- File articles of dissolution
- Close credit accounts and business bank accounts
- Pay off business debts
- Complete final payroll and income tax returns
Building a successful business begins with a strong foundation that contains clear objectives and a well-written business plan. Once your business is up and running, you can look for signs of success like repeat customers and referrals or creating a strong presence in the community. To measure your company’s success, you can use financial metrics or other key performance indicators. If the results are not as you’d hoped and you are concerned your business may fail, decide to turn things around or cut your losses. If your goal is to save the business, consider revisiting your marketing strategy and business plan. You should also speak with a financing expert at Biz2Credit to learn more about business financing options, like the merchant cash advance that allowed this software developer to get their business back on the right track.