Businesses need a plan to guide them

By Edgar Ortiz

For the AJC

Successful businesses don't just happen, bloom and flourish by themselves.

They are the result of well-defined strategies and the methodical execution of plans designed to support them.

Unfortunately, many small business owners, excited at the prospects of owning their own business, overlook and bypass this important and critical planning phase and fail. Many of them, unfortunately, confuse the passion, desire and excitement of owning a business with business strategy.

A well thought-out business strategy forces a business owner to have a clear vision of where to take the business, how to get there, how to respond to market changes, how much time to get there and the skills, team and resources required to make a successful journey. It is a blueprint to achieve success.

The process of developing a strategy makes business owners think about the future and forces them to think objectively about the challenges they will face and the skills they will need to be successful: leadership, management skills, marketing, finances, sales, technology, compliance and customer service.

By and large, very few small business owners take the time required to define the strategic framework to run their businesses. As a result, most operate in a "reactive" mode, unprepared to respond to market changes and competitors' threats; rather than being "proactive" and establishing market leadership.

In business, there are no guarantees. There is no way to identify, manage and control all of the risk factors required to run a successful business. You can, however, improve your chances of success by ensuring that before you launch a business and put your life savings, home equity or 401(k) retirement funds at risk, you fully understand the trade-offs and risks involved in your decision to become a small business owner.

Starting a business without a strategy is analogous to embarking on a journey of unknown destination. You may or may not get there. By recognizing the risks and opportunities that lie ahead early on, small business owners will be better prepared to make informed decisions. Industry statistics are compelling. More than 90 percent of small businesses that fail do so because of a lack of strategy and poor planning.

It is no wonder, therefore, that small businesses experience such a high failure rate:

One fourth of new businesses fail within their first year.

One third of new businesses fail within two years

Half of new businesses fail within four years.

Only one in three businesses is still in operation 10 years later.

The current recession with its reduced access to business loans, tighter credit standards, reduced credit card limits, curtailed consumer demand and vanishing home equity (a main source of small business financing) has contributed to an increase in commercial bankruptcies, which posted a 52 percent increase in the first five months of 2009 versus the prior year.

Business failure is not an episodic event that happens all of a sudden at any one moment. Rather, "at risk" businesses show identifiable warning signals that trouble lies ahead.

Whether or not you are a small business owner or have plans to become one, the following warning signals are reliable indicators of imminent financial trouble that can sink a business in no time if left untreated:

Undercapitalization: Underestimating the capital resources needed to operate a business in the early startup phase.

Declining revenue: Indication of a softening demand for products and services.

Cash flow problems: Not having sufficient cash to meet and manage inflows and outflows of money.

Rising inventories: Indicates softening demand or intensifying competition.

Growing receivables: Lack of proper internal controls and processes to ensure the timely payment for products and services.

Growing debt-to-asset ratio: Over-leveraged business, too much debt burden.

Growing customer attrition: A shrinking customer base. Loyal customers at competitors' businesses.

Growing competition: Unprepared to face new competitors head-to-head. Poor pricing strategies.

Declining marketing effectiveness: Poor response rates to customer offers, declining online traffic and poor social media presence.

To recognize these symptoms requires knowledge. However, a major problem is that many business owners do not realize what they don't know. Running a profitable business requires multiple skills, and very few business owners have them. What options then do small business owners have to improve the odds their businesses will succeed?

Do not wait until it's too late. Reach out.

Edgar Ortiz is president and CEO of Strategic Analytic Solutions, an Atlanta-based firm that provides planning, predictive analytics, data mining and advisory services to small and midsize businesses. He can be reached at eortiz@strategic analyticsolutions.com.