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The importance of Small Businesses

Dennis Kish, Licensed Insolvency TrusteeThe success of your small business is obviously very important to you and your family. It is also very important to the Canadian economy. According to Statistics Canada, small business contributes 70% of the total Canadian private labour force, and contributed 78% of all private jobs created in Canada between 2002 and 2012. Small business is also believed to contribute up to 41% of the Canadian Gross Domestic Product. Statistics Canada describes small business as innovative, adept at knowing consumer tastes, and at producing quality and flexible products and services. Unfortunately, however, Canadian small business is prone to failure. 32% of small businesses fail within two years, and 50% fail within five years; with a declining rate of survival over time. Many struggling small businesses are able to restructure or file formal proposals to get through difficult times; however, bankruptcy is the unfortunate end result of many struggling small businesses. As seen from the eyes of a licensed insolvency professional, there are many reasons why small businesses fail. For example, there are external reasons, such as economic downturns, increased competition, government regulations, and technological changes. However, small businesses usually fail for internal reasons that are within the owner’s control; namely lack of proper management skills and lack of proper marketing skills. In other words, and to put it more bluntly, small businesses usually fail because the owners do not know how to operate a business. Statistics Canada has succinctly said, “bankrupt firms simply fail at the basics.

Being great at your profession is not enough

Make no mistake. The owner may be excellent at what he or she does. For example, the owner of a cabinet making business may be an excellent carpenter. However, that, in and of itself, is usually not enough. In today’s competitive environment, the carpenter must also excel at managing the business, managing its finances, and at marketing the business. If not, the business will be prone to failure, even if he or she is the best carpenter in town. Many who venture into business hold the mistaken believe that being skilled at their trade is enough to succeed in business, and neglect honing their management and marketing skills.

Management and marketing skills

So, what are management and marketing skills? The list is far too long and complex to discuss within the context of this short article. However, two things are worth emphasizing. First, there is no substitute for continuing to study and learn these management and marketing skills, no matter how skilled you currently are. Read books, take college courses, consult with experts, talk to colleagues, etc. Second, and similarly, every good business owner knows the importance of delegation and turning to skilled and experienced employees, colleagues, networking contacts, etc., for help and advice. Turn to accountants, bookkeepers, lawyers, coaches, etc. Too many small businesses suffer from the lack of managerial depth caused by “one-man rule”, where the owner feels compelled to control everything. Some examples of general management skills are:

  • having a proper vision for the business;
  • having a good business plan;
  • working the business plan; and
  • stopping a strategy that is not working.

Examples of financial management skills are:

  • keeping proper accounting records and financial reports;
  • keeping a low debt-to-equity ratio;
  • keeping adequate operating capital on hand;
  • strong money/cost management skills; and
  • forecasting and making changes when actual results fall short of forecasts.

Examples of marketing skills are:

  • finding a market niche;
  • choosing a good location;
  • monitoring your competition;
  • developing and working a good marketing plan;
  • networking and meeting people who may be good referral sources;
  • developing a value proposition (“elevator speech”); and
  • keeping in touch with customers and adapting to changes in market demands.

Know when to get help

in our competitive world, there is no guarantee that any small business will succeed, even if the owner is extremely adept at their given trade. However, steps can be taken to reduce odds of failure and increase the chances to succeed and become strong enough to weather the storms caused by external factors, such as economic downturns or increased competition. Educate yourself and don’t hesitate to turn to other professionals for help, especially when you notice the warning signs of failure. Some common warning signs that a small business may be in trouble are:

  • excessive outstanding accounts receivable owing to your business;
  • sales concentrated in too few customers;
  • excessive inventories and slow turnover;
  • build up of debt to suppliers or trades;
  • build up of debts to Canada Revenue Agency (unremitted HST or source deductions);
  • outstanding tax returns to be filed;
  • high debt-to-asset ratio; and
  • bank debt levels near credit limits.

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