|
Posted by A. B. Dada on February 1st, 2006
A very close friend of mine is in the process of losing his businesses due to a sudden change in the market. Of course he accepts the blame for not watching his numbers more closely, which is a very common reason for corporate bankruptcy. I recently lost a business for the same reasons — my first real failure in over 15 years. I had always watched cash flow and forecast best and worst case scenarios, and when I stopped, so did the profit. Lucky for me I have other businesses to focus on, so the correction time is very minimal. For most business owners, they put all their eggs in one basket, and when things start to go wrong, they throw good money at a bad problem, making their lives more miserable.
One big learning experience from both our experiences is to have a proper cash flow forecast. I really could spend the entire month of February on how to manage cash flow, but I’ll just spend a few articles a week helping bring some understanding to a need that isn’t that hard to cover on a daily basis, but will quickly get away from you if you forget to track your cash flow even for a few days in a row.
Another big learning experience is making sure you’re targetting a real market, not a trend or a fad. You can make money on trends and fads, but you have to do so with the full knowledge that tomorrow could be the end of the trend. Before entering a trend or fad market, you must hit profitability quickly, and you have to make sure you’re not committed to anything for the long haul — leases, credit cards or even employment contracts. Always assume that next week will be your last.
You can expand on this even more by looking at the two markets that are the most successful for small business owners: selling to the masses or selling to the few. The definition of masses here is “something that everyone could use,” not a specific market such as 30 year old single men. Selling to the few means “something that only a niche market would understand and want.” The market in between — part specific part quantity — is the worst market to target. As your market target ages or marries or outgrows what you’re selling, you may find that the next target group has no interest in what the previous generation wants. I watched a friend’s business 5 years ago close its doors within 3 months of hitting their record profits. The generation moved on immediately after they hit their high school graduation. Ouch.
When you look at the product or service you want to sell or provide, you have to be honest about who the market will be. Just because you believe that every mother and child and great uncle will want your new rubber widget doesn’t mean that they will. You have to spend the time sincerely asking others for their honest advice. Niche markets can be a lot steadier if you realize that you will grow slow if you treat your limited customer base with an incredible amount of patience, respect and personal attention.
The market in between the two is the hardest to handle. The more limited masses have a higher expection of service and attention, but they also want to spend as little as possible. Niche markets give you the opportunity to sell your time at a premium, and mass markets give you the opportunity to sell-and-forget who you’re selling to. Selling to the middle group means you’ll have to combine the worst situations of the edge markets: personal attention combined with low prices.
If you give it some thought, you can see why so many businesses fail. They’re either selling a niche product targetted to everyone, or they’re selling a mass market product in a niche environment. Both are causes for failure. Chasing the middle group is fine for gaining business experience, but that is what you’ll profit in — experience, not cash.
This week I will be focusing more on cash flow situations. I’ll introduce you to some basic spreadsheets, basic terms and hidden demons that can foul up cash flow without reasoning, unless you know from hindsight what can mess up your best case scenario forecasts.
This site is now part of the Global Unanimocracy Network.