Avoid 'better mousetrap' syndrome when starting a business

As highly successful college football coach Lou Holtz said, "Most people fail because they fail to understand what they are trying to do." When entrepreneurs start a business, their personal desire may be clear but the clarity of their business vision is usually clouded by their passion, their energy, their willingness to be a risk-taker and their sincere belief that they can do it better than anyone else.

The hard reality of statistics as reported by the Small Business Administration is that:

• 66 percent of new employer businesses survive at least two years,
• 44 percent survive at least four years, and
• 20 percent will survive five years.

Of the 20 percent that survive the first five years, only 20 percent will survive the second five years; in other words, only 4 percent of businesses survive the first 10 years of operation.

The fundamental first step to being successful is to understand the reason or reasons you are starting the business.

This requires understanding the difference between building a business and just creating a job. Too often, businesses fail because the owner, with his or her entrepreneurial excitement, feels that their own passion is shared by others. To start a successful business, the market must be large enough to build a profitable business

Another start-up consideration is to make sure business goals are aligned to the owner's personal goals. Too often, the business owner gets so caught up in day-to-day operations they lose contact with the reasons that led them to starting the business in the first place.

If the business does not let you achieve personal goals, why would you go into business?

Create a business plan

The solution is a well thought-out and realistic business plan, a road map to building the business.

The business plan helps to focus on goals, identify action plans and achieve goals.

It provides a tool to measure the level of success in building the business, and it helps identify the need to make changes based on actual market performance.

There are a number of electronic business plan templates that can be purchased at bookstores. The UW Business School in Madison and the Southwest Wisconsin Small Business Development Center offer a number of excellent short-term programs for entrepreneurs to prepare them at this early decision-making process of starting a new business.

Reasons for failure

The main reasons for small business failures, according to several studies, are poor management, lack of business experience and not providing effective leadership.

New business owners frequently lack relevant business, management and leadership experience in areas such as finance, cash flow budgeting/forecasting, purchasing, production, marketing, selling, advertising, public relations, customer service, hiring and managing employees, market research and analysis.

Unless the owner recognizes what they don't do well, and invests in seeking appropriate help, they will face business problems quickly. Even as success occurs, it will always be important to continually measure against the goals of the business.

Planning, execution critical to success

Unfortunately, the passion, the energy, the enthusiasm, the willingness to be a risk-taker, the belief in one's self as an entrepreneur will override the need for financial knowledge, planning and execution skills that are critical to the success of every business.

The hope that the better mousetrap will automatically build a business is too prevalent among entrepreneurs. This frequently leads to poor record keeping, a lack of financial controls, and missed regulatory compliances and other business filings.

With poor financial management, there is the common and frequently fatal mistake of having insufficient operating funds and working capital.

Business owners consistently underestimate how much money is needed to cover their planned operations and the unknown changes that will occur as they get into the marketplace.

It is not just the cost of starting the business, it is the cost of continuing the business. A leading cause of failure is over-expansion, which can happen when business owners confuse success with how fast they can expand their business. A rule of thumb is that the entrepreneur should be able to live for the first two years without any income from the business.

Outside advice is needed for developing and challenging, detailed financial assumptions of the business covering operations for the first three years of the business.

Get outside advice

The assumptions need to be challenged by outsiders who have operations and industry experience that relate to the entrepreneur's proposed business.

This financial data will be integrated with the business plan that must be developed for any new or ongoing business.

Reinforcing the principle that start-up business plan finances will initially tend to be over-optimistic is reflected in the way venture capitalists tend to evaluate new business plan finances -- they cut the revenue in half and double the time to success proposed by the entrepreneur, and then they examine the viability of the business plan.

Entrepreneurs made the United States a great country. New entrepreneurs can achieve success by:

• Being aware of obvious business and personal mistakes to avoid.
• By planning a business model that is financially realistic on a 12-month forecast consistent with a three-year business vision.
• By breaking operating tactics to 90-day segments, and
• By not trying to do everything on their own.

If the above guidelines are followed, it should not be difficult to dramatically improve the current new business success rate of only 4 percent surviving the first 10 years from launch.

Iain Macfarlane is the president and founder of BizCOACHING & Associates in Madison, a franchise of ActionCOACH Business Coaching. He was named "Coach of the Year 2005."