A few years ago when the entrepreneurship bug bit me, I took a few small business start-up workshops offered by my Graduate school. During one of the seminars, the speaker asked the audience to list the biggest risks associated with a business. The audience rattled off various dangers and obstacles that promote a business’s demise. After a silence that seemed like an eternity he said “I submit that the biggest reason for failure, the biggest risk…is you the business owner!” Very often we as human beings delegate errors or failures to factors outside of ourselves. However, acknowledging that we are the reason for failures is the first step to taking corrective measures. The following are several traditional reasons for business failures and a small sample of ways Excel can be used to mitigate those failures.
The first traditional reason for business failure is lack of capital. Many businesses misjudge the capital needed to run and operate a business for a determined period of time. A few Excel based tools can assist in determining the proper startup and operational funds needed.
Financial and Budgeting Modeling – Create an Excel model. Models are a representation or replica of a financial decision. A model can be used to stress test various environments on a new or seasoned business venture. Use Excel models to test several variations and possibilities for business funding. One key point to keep in mind when developing a budget model is always add reserves for unexpected events. I customarily add 10 to 15% in additional expenses to protect against unforeseen items.
Product Pricing Comparison – Determining the proper price point for a product or service can be a complex process. The first step is gathering comparable items. These items can be broken down by location, specific service\product in addition to a host of other differentiating amenities. To take it a step further use Excel to create a profile of the different market segments and determine the profitability of each segment. That information can be used to direct limited resources on the niche to likely create the most profit.
Chronic Negative Cash Flow
Think of cash flows as the blood of a business. Without an adequate supply of that life giving substance the business will perish. A lack of cash to pay current bills can ultimately lead to business closure. Microsoft Excel can be used to monitor and project your cash flow needs.
Cash Flow Forecasting – Set up a spreadsheet that lists monthly revenue and expenses. Take the difference between these two areas monitor it from month to month. In addition incorporate anticipated expenditures in future months. An example of this is available for download at www.ExcellentOnes.com in the free resources section. The ability to forecast cash gaps is both a science and an art form. Being aware of an impending cash gap means preparations can be made.
Profit and Loss Statement and Analysis – These statements quickly analyze the sustainability of an organization. In many cases, a 3 to 5 year forecast should be prepared. A business that is not sustainable within that time as a rule of thumb should not be entertained.
Lack of Labor
Lack of sufficient labor is another reason for business failure. Many business owners play multiple roles within their organization. They answer phones, “balance the books”, get the mail and hundreds of other miscellaneous tasks. Very often, these tasks are done at the expense of one of the most important tasks, marketing and promotion. Hiring additional assistance is an option that few small business owners can afford, but there is a little known alternative. Many labor intensive tasks can be automated using Microsoft Excel. Below are a few examples of Microsoft Excel based automation:
Collate & email reports – One time consuming task which takes place multiple times a day for individuals and thousands throughout an organization is the distribution of reports, memos, articles via email. Processes, such as those are repetitive and time consuming. Routine reports or email distributions can be automated using tools available in Microsoft Excel. An Excel based program can be developed to utilize data housed in various places, such as Excel and Outlook (email addresses, delivery name, file attachment location etc.) to quickly create and distribute emails. Emails can even be highly customized to remove the “feeling” that a “robot” sent the email.
Gather Data from Internet – The Internet is a treasure trove of data. However, that treasure trove can easily turn into a mounting debt due to information overload. How can relevant information be located and downloaded to Excel without wasting hours? That process can be automated as well. For example, a book store might want to compare its price for a particular title with other vendors in the area. That can be done by using the ISBN number, Excel and an Internet connection. What would take hours to manually Excel can accomplish this in the matter of minutes.
Lack of Management
Very often businesses fail due to a lack of proper management. Management is the process of assembling and leading a group of people to a desired goal. This role requires the control of human, financial, technological and other physical resources. The control of these limited items can be assisted by Excel. In short Excel can help business owners organize everything from finances to inventory to marketing. The progress or consumption of these resources can be monitored via an Excel based dashboard.
One of the main business problems touted by many business owners is the lack of sales. In truth, “lack of sales” is not the reason for failure but the end product. Lack of sales is a result of factors like poor market selection or unfocused marketing efforts to name a few. In part that inability may be due to overestimating the market/niche market or poorly communicating to target demographics. Use Excel to justify your marketing efforts and locate the communication channels providing the most return.
Forecast Sales Model- As in the previous situation use Excel to create a model. The model needs to be built in a dynamic way so that anyone can test a best, intermediate and worst case scenario. Armed with these three scenarios, business owners can then make better judgments on sales projections. This model should contain as much research on the targeted market as possible. How much sales does this industry have on average? What is the revenue range for your competitors? How many competitors? Which one is the market leader? Is growth expected in future years? How can you quantify the business or product uniqueness in sales? How will the product be marketed and what percentage of impressions is expected to result in sales? Many of these questions can be answered through research.
For my own business, I did just that: create a huge interactive Excel model to stress test the feasibility during the startup stage and now growth stage.
According to the Small Business Administration, more than half of small businesses fail within the first five years. Those failures occur for various reasons. To combat that mountain, business owners need to employ and maximize all tools at their disposal. Businesses fail for various reasons, however being cognizant of the traditional reasons is simply not enough. Use Excel and other technology to build systems to mitigate the traditional reasons for failure.