How do small businesses survive

Explaining The K-Shaped Economic Recovery from Covid A K-shaped recovery exists post-recession where various segments of the economy recover at their own rates or levels, as opposed to a uniform recovery where each industry takes the same Both on paper and in real life, there is a solid relationship between economics, public choice, and politics.

The economy is one of the major political arenas after all. Many have filed for bankruptcy, with an Small firms Business economics Survival of Small Firms.

Survival of small firms Despite the benefits of operating on a large scale, independent and non-subsidiary small and medium sized firms SMEs still survive, and indeed make up the vast majority of firms. Why do small firms survive? Business researchers have developed a number of models over the last 20 years that seek to delineate stages of corporate growth. Joseph W. McGuire, building on the work of W. Lawrence L. Steinmetz theorized that to survive, small businesses must move through four stages of growth.

Steinmetz envisioned each stage ending with a critical phase that must be dealt with before the company could enter the next stage. Direct supervision. The simplest stage, at the end of which the owner must become a manager by learning to delegate to others.

Supervised supervision. To move on, the manager must devote attention to growth and expansion, manage increased overhead and complex finances, and learn to become an administrator.

Indirect control. To grow and survive, the company must learn to delegate tasks to key managers and to deal with diminishing absolute rate of return and overstaffing at the middle levels.

Divisional organization. Roland Christensen and Bruce R. Scott focused on development of organizational complexity in a business as it evolves in its product-market relationships. Finally, Larry E. Greiner proposed a model of corporate evolution in which business organizations move through five phases of growth as they make the transition from small to large in sales and employees and from young to mature.

Each phase is distinguished by an evolution from the prior phase and then by a revolution or crisis, which precipitates a jump into the next phase. Each evolutionary phase is characterized by a particular managerial style and each revolutionary period by a dominant management problem faced by the company. These phases and crises are shown in Exhibit 1.

Larry E. Among the important tasks are to make sure the basic business stays profitable so that it will not outrun its source of cash and to develop managers to meet the needs of the growing business. Systems should also be installed with attention to forthcoming needs. Operational planning is, as in substage III-D, in the form of budgets, but strategic planning is extensive and deeply involves the owner. Indeed, III-G is often the first attempt at growing before commitment to a growth strategy.

If not, retrenchment to the Survival Stage may be possible prior to bankruptcy or a distress sale. In this stage the key problems are how to grow rapidly and how to finance that growth. The most important questions, then, are in the following areas:. Can the owner delegate responsibility to others to improve the managerial effectiveness of a fast growing and increasingly complex enterprise? Further, will the action be true delegation with controls on performance and a willingness to see mistakes made, or will it be abdication, as is so often the case?

The organization is decentralized and, at least in part, divisionalized—usually in either sales or production. The key managers must be very competent to handle a growing and complex business environment. The systems, strained by growth, are becoming more refined and extensive. Both operational and strategic planning are being done and involve specific managers. If the owner rises to the challenges of a growing company, both financially and managerially, it can become a big business.

If not, it can usually be sold—at a profit—provided the owner recognizes his or her limitations soon enough. Too often, those who bring the business to the Success Stage are unsuccessful in Stage IV, either because they try to grow too fast and run out of cash the owner falls victim to the omnipotence syndrome , or are unable to delegate effectively enough to make the company work the omniscience syndrome.

It is, of course, possible for the company to traverse this high-growth stage without the original management. If the company fails to make the big time, it may be able to retrench and continue as a successful and substantial company at a state of equilibrium endpoint 7 on Exhibit 4.

Or it may drop back to Stage III endpoint 6 or, if the problems are too extensive, it may drop all the way back to the Survival Stage endpoint 5 or even fail. High interest rates and uneven economic conditions have made the latter two possibilities all too real in the early s. The greatest concerns of a company entering this stage are, first, to consolidate and control the financial gains brought on by rapid growth and, second, to retain the advantages of small size, including flexibility of response and the entrepreneurial spirit.

The corporation must expand the management force fast enough to eliminate the inefficiencies that growth can produce and professionalize the company by use of such tools as budgets, strategic planning, management by objectives, and standard cost systems—and do this without stifling its entrepreneurial qualities.

A company in Stage V has the staff and financial resources to engage in detailed operational and strategic planning. The management is decentralized, adequately staffed, and experienced. And systems are extensive and well developed. The owner and the business are quite separate, both financially and operationally. The company has now arrived.

It has the advantages of size, financial resources, and managerial talent. If it can preserve its entrepreneurial spirit, it will be a formidable force in the market.

If not, it may enter a sixth stage of sorts: ossification. Ossification is characterized by a lack of innovative decision making and the avoidance of risks. It seems most common in large corporations whose sizable market share, buying power, and financial resources keep them viable until there is a major change in the environment.

Unfortunately for these businesses, it is usually their rapidly growing competitors that notice the environmental change first. Several factors, which change in importance as the business grows and develops, are prominent in determining ultimate success or failure.

We identified eight such factors in our research, of which four relate to the enterprise and four to the owner. The four that relate to the company are as follows:. Personnel resources, relating to numbers, depth, and quality of people, particularly at the management and staff levels. Systems resources, in terms of the degree of sophistication of both information and planning and control systems.

Business resources, including customer relations, market share, supplier relations, manufacturing and distribution processes, technology and reputation, all of which give the company a position in its industry and market. As a business moves from one stage to another, the importance of the factors changes.

See Exhibit 5. The changing nature of managerial challenges becomes apparent when one examines Exhibit 5. This factor is thus of the highest importance. At the same time, the owner must spend less time doing and more time managing.

He or she must increase the amount of work done through other people, which means delegating. The inability of many founders to let go of doing and to begin managing and delegating explains the demise of many businesses in substage III-G and Stage IV. The owner contemplating a growth strategy must understand the change in personal activities such a decision entails and examine the managerial needs depicted in Exhibit 5.

The importance of cash changes as the business changes. It is an extremely important resource at the start, becomes easily manageable at the Success Stage, and is a main concern again if the organization begins to grow. The issues of people, planning, and systems gradually increase in importance as the company progresses from slow initial growth substage III-G to rapid growth Stage IV. These resources must be acquired somewhat in advance of the growth stage so that they are in place when needed.

Matching business and personal goals is crucial in the Existence Stage because the owner must recognize and be reconciled to the heavy financial and time-energy demands of the new business. Some find these demands more than they can handle. In the Survival Stage, however, the owner has achieved the necessary reconciliation and survival is paramount; matching of goals is thus irrelevant in Stage II. A second serious period for goal matching occurs in the Success Stage.

Does the owner wish to commit his or her time and risk the accumulated equity of the business in order to grow or instead prefer to savor some of the benefits of success? How does break-even analysis differ in big businesses? For one thing, in a big business, the additional break-even operation is usually small compared with the size of the whole business.

When a big business starts a new project, it can draw on the services of planners, designers, and analysts with access to historical data on indirect expenses. When launched, the new project may be sized for ongoing operations well beyond the break-even. Because owner-managers of small businesses have few, if any, staff people to prepare plans and analyses, decisions to launch new projects are typically based more on hunch, necessity, or desire than on cold and extensive analysis.

The company probably has little experience on which to draw for predictions of indirect expenses. Even if it does have experience, data are likely to be scarce. Small businesses seldom have large and stable operations from which to launch a new endeavor.

Typically, financial troubles at the new operation threaten the existence of the basic business. A break-even graph plotted on broad assumptions about fixed and variable expenses can be misleading. The accuracy of the break-even analysis depends on detailed and conservative planning. Planning for growth by small businesses is often superficial. That the small business can afford little more is cold comfort when a new endeavor begins to go awry.

Owner-managers embarking on a new project or product can benefit from visualizing the future operations in great detail. They can portray operations in the income statement format of Exhibits I and II, changing the numbers to reflect a variety of contingencies and deciding how to handle these various situations in advance. A popular business premise is that the primary objective of management is to maximize the return on invested capital to the benefit of the owners.

This seems a reasonable premise for a small business, since the owner-manager is one of the owner-beneficiaries. Return on investment can be defined in a variety of ways.

Most often, of course, ROI is expressed as a fraction with earnings as the numerator. The denominator varies according to what is considered to be the investment. To increase ROI, you increase profits. Exhibit VII portrays four months in the life of a thriving small business. Labor expense is 40 cents per unit.

The owner-manager has held the cost of materials to 80 cents per unit by taking advantage of a quantity price break for purchasing units in lots of 15, and for payment in the month the materials are received.

Exhibit VIII shows what can be expected to happen at the bank. The materials purchasing schedule in Exhibit IX is needed to determine the disbursements for materials.

The owner-manager concluded that the numerator of the ROI ratio could be improved by raising sales. It might be hard to increase cash sales, but if the product were offered on credit, sales could rise dramatically. The manager decided to change the forecast to reflect a best guess of what would happen if terms of net 30 days were offered. That forecast saw monthly sales increasing by an additional 4, units each month.

The revised forecast income statement is shown in Exhibit X. Profit improved dramatically. At the bank, things did not look very comfortable. The company forecasted negative cash flow and overdrafts in three of the four months, as shown in Exhibit XI. The materials supplier offered what appeared to be a way out of this dilemma.

Since materials were the largest item of expense, this reduction would improve the operating results, instead of paying 80 cents per unit, the company would pay only 72 cents. The owner-manager revised the forecast one more time. The results of the three forecasts are compared in Exhibit XII.

Each move to improve ROI resulted in trading liquidity for profit. Thus, additional financing through debt or equity or a combination of the two was required.

A small business can survive a surprisingly long time without a profit. In a small company, the cash flow is more important than the magnitude of the profit or the ROI. Liquidity is a matter of life or death for the small business. Owner-managers who are aware of the profit and cash flow relationships expressed in Exhibits VII through XII will recognize that the priority is to maintain liquidity.

There must, of course, be some profit, but the efficiency with which profit is produced—the ROI—is secondary.

To grow you must survive. Borrowing negotiations are very personal. The lender looks to the owner-manager for repayment and recalls past experience with small borrowers. Many commercial loan officers have observed that a client had record sales during the month that the company folded. Businesses have a hierarchy of needs that are related to their sizes and their resources. At the lowest level, management is occupied with making a sale and producing the required product or service.

As these events occur, the next needs arise—to generate profit and cash flow. Once these are accomplished with some regularity, management can devote time and energy to the next need, which is to improve the efficiency with which profit is generated.

In most small businesses the manager is confined to the middle tier in this hierarchy. Lenders usually have a list of criteria for identifying good prospective clients. One of the criteria high on their list is a low debt-equity ratio.

Typically, lenders want the total debt-equity ratio to be no more than 2 after the proceeds of the loan are incorporated into the balance sheet.

Most successful big businesses have debt-equity ratios of 2 or less. When the net worth is only a little more than zero, the ratio becomes incredibly large. The banker calculated the debt-equity ratio at 60, not counting the short-term debt the company already had. Debt financing was out of the question. This phenomenon occurs at some point in the lives of almost all small businesses.

It is quite often a predictable phase on the road to success. Blind application of the debt-equity ratio criteria to a business in that phase can, and often does, threaten its survival.

The small business that survives start-up losses may have excellent capacity to service an additional debt burden. But the business must generate sales and earnings for a considerable period of time before its net equity on the balance sheet approaches a reasonable sum acceptable to most bankers and investors. It has to earn back the start-up losses. Acquiring additional equity when the company is in this phase of growth is extremely difficult. The original investors have watched their holding dwindle from the losses of the start-up period.

Now they want their capital returned before allowing other investors to reap the benefits. Also, original investors have often paid steep prices for their ownership. The offering price to new investors will likely be lower since it must be based on the current financial statements. It is during this phase that the original stockholders often develop investor fatigue.