Jun 9, 2008

Why Do Small {Scrapbook} Businesses Fail?

I found this article at Allbusiness. There is some great advice in here. I've added my industry-related comments to each one in red.

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According to the Small Business Administration, two-thirds of new businesses survive for at least two years, and only 44 percent survive at least four years. Why some businesses fail and why some succeed is a matter of debate, although there are some common mistakes that can sink a business in no time. Give your new business venture a fighting chance by taking care to avoid these fatal errors:

  • Over-expansion. Wanting to be the first to market with a new product, taking on added overhead, and the need to demonstrate revenue growth to anxious investors can all induce businesses to overextend themselves financially. Rather than head down this path, start with realistic goals and allow yourself to grow as needs dictate. Let your revenue, not pie-in-the-sky projections, dictate your hiring practices. Opening an online store, a bricks and mortar store and starting a kit club in the same month is ambitious, but wrong. Many times the most successful businesses have many different irons in the fire, but they build it over time - responding to customer demand. You can't juggle all those balls without knowing what you're doing.
  • Poor capital structure. Look at the businesses that fail and you'll find that many of them took on too much debt. Learn to pay strict attention to your finances and keep careful records of all money coming in and going out. Even if everything's coming up roses today, trouble can still be right around the corner. So many times, scrapbookers want to start a business with too little money. There is the idea that you can start with nothing and build a business. Not so - especially when you start a store. The old adage that it takes money to make money is true.
  • Overspending. Many startups spend their seed money before cash has begun to flow in at a positive rate. This often happens because of misconception about how business operates. If you're just starting out in business, seek out seasoned veterans you can bounce your ideas off of prior to making big financial commitments. If you've ever been to an industry trade-show, you know how many fun goodies are out there. You want them all, but you can't afford them all. Many people fill the credit cards without a true plan to sell the inventory. And, since products go stale pretty fast in this industry, you need to move what you bought at the door very quickly.
  • Lack of reserve funds. Failing to prepare for volatile markets and uncontrollable costs like energy-rate increases, materials, labor, natural disasters, and the like is another top reason many businesses fail. Make sure you protect your investment and keep enough reserve cash to carry you through market downtrends and seasonal slowness. If most people try to start a scrapbook store with very little money in the first place, I can guarantee they have nothing held back for down the road. I love it when I see new stores act like the world is their oyster when they are doing so great their first few months. Come back to me in a year and tell me you're turning a profit. The money's gone and they are tapping into credit cards, home equity and retirement accounts to keep it going.
  • Bad business location. Don't let a cheap lease tempt you into opening your doors in the wrong neighborhood if your gut is telling you it's not right. Key factors to consider include competition (how many other similar businesses are located nearby?) and accessibility (is the area well served by freeways, public transportation, and foot traffic?). The idea that you can open a scrapbook store and customers will find you is so 1999. Location, location, location! But, then, that costs money.
  • Poor execution and internal controls. Poor customer service, accounting controls, and overall employee incompetence can all combine to bring down the ship. Make sure you and your employees place a premium on customer service to generate repeat business, establish protocols for how tasks should be accomplished, and remain continually in the know on all things accounting. Really, the lack of knowing what the heck you are doing is the biggest reason scrapbook businesses fail. You can't "fake it 'till you make it". You have to hit the ground running or your business will eat you alive very quickly. That's why ScrapBiz was started - to inject some business info into the industry.
  • An inadequate business plan. Your business plan is your blueprint for success. A well-thought-out business plan forces you to think about the future and the challenges you'll face. It also forces you to consider your financial needs, your marketing and management plans, your competition, and your overall strategy for coming out on top. This is so not fun for most people. I wish I had a dollar for every horror story where I heard that someone woke up on Monday and decided to open a scrapbook store and signed a 5 year lease on Friday. Then they emailed me and said, "Where do I buy products?" YIKES! I wish business planning was exciting, then more people would do it and fewer people would fail.
  • Failure to change with the times. The only constant in business is change. Once mighty behemoths fall to earth while unknown upstarts rise to prominence. The ability to recognize opportunities and be flexible enough to adapt to changing times is a key ingredient to surviving and even prospering in the toughest business climate. Therefore, learn how to wear multiple hats and to generate new interests and areas of expertise. Ummm, digital scrapbooking and photo books come to mind. The industry is changing, we need to change with the demands of our customers or get REALLY GOOD at marketing and bringing new scrappers into our industry.
  • Ineffective marketing and self-promotion. Customers can't walk through your front door if they don't know you're there. Learn how to cost-effectively advertise and promote your business through such tried-and-true methods as direct mail, ads in local newspapers, Web sites, blogs, even by sponsoring a local little league team. The number of advertising and promotional ideas that exist is only limited by your own creativity. As an industry, we totally STINK at this one. I don't mean "stink" just a little, I mean S*T*I*N*K (like get me a gas mask)! We think that our opt-in email list is a marketing plan. Those people already know about you.
  • Underestimating the competition. Consumer loyalty doesn't just happen; you have to earn it. If you don't take care of your customers, your competition will. Watch your competition as closely as you do your own employees. I always chuckle when someone opens a store because there isn't one in their town. Do they not own a computer? There IS competition. Online stores are competition. Walmart in the next town is competition. Scrappers are already getting products from somewhere. You have to be good enough to make them switch!

1 comment:

Business Management Basics said...

Hi Kim,

Some comment from a man! I know nothing about scrapbooking but do know something about business so here's my comment on your excellent comments.

Your points on capital, overspending and reserve funds all boil down to two factors- lack of a comprehensive business plan and the knowledge in how to use any available monies. Both are essential for long term success.

Regarding location it takes very few extra customers to cover the extra cost of a good location. In my experience it pays to always go for the better location.

Poor locations label your business as poor also!

Good Luck All,

Steve Coleman

www.businessmanagementbasics.com