As the founder of a business that serves thousands of entrepreneurial organizations, I have had many conversations with owners about what it takes to build and run a sustainable small business.
Small business sustainability comes from clear goals, smart financial management, and the ability to adapt as the market shifts.
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A sustainable small business can weather bad times and reap the benefits of good times. Sustainability is important considering that according to the U.S. Bureau of Labor Statistics, 20% of small businesses fail in their first year and over half fail in their first five to ten years. This statistic is not surprising since many entrepreneurs start businesses inspired by a passion for a particular product or service but lack experience running a P & L, don’t have the funding it takes to lay the groundwork for success, and lack the acumen to manage a team.
Despite these challenges, each year it becomes easier to establish an internet-based ecommerce business – thanks to cloud computing, third-party logistics and AI coding. While many passion-led businesses can achieve initial traction and operate for a short period of time, long-term viability requires adopting a practical approach.
The following are some initial considerations to set the groundwork for achieving sustainability. In part two of this series, we’ll dive deeper to address additional steps.
Establish top line goals for small business sustainability
The first step is to set goals for what sustainability means to you. For example:
- “I want to elevate my side hustle into a full-time business that supports my lifestyle.”
- “We need to grow our customer base and increase revenue to achieve profitability.”
- “Our goal is to operate strategically, and minimize desperate short-term financial needs.”
- “I’d like my business to generate enough cash so that I can quit my day job.”
- “I want my business to support the lifestyle my family deserves.”
- “I’d like to have more profitable customers who need less service and spend more.”
Be realistic about your small business’ target sector
Examine your marketplace and competition. This will help you gain a realistic understanding of your target sector’s growth rate. Take into account that eCommerce is projected to grow at 7% to 9% annually through the end of the decade according to the U.S. Census Bureau, eMarketer and Mordor Intelligence. There’s little reason for this growth to slow down since eCommerce still only represents 15% of our national retail economy according to the U.S. Census and Statista. On the other hand, small online retailers should have a strategy to contend with the dominance of Amazon.
Business owners need to be realistic about their domain expertise and business acumen. A strong product vision may not be enough to overcome a lack of grounding in technology, logistics, marketing, or finance – all of which can impact sustainability.
Begin with the end in mind
The most important principle for creating sustainability is to begin with the end in mind. After you have set your goals, build backwards to determine what’s required to achieve them. Take, for instance, earning a steady income,
Many entrepreneurs don’t draw an income when starting their business. Instead, they plow every dollar of profit and positive cash flow back into the business. The business might be viewed as a side hustle while they continue funding living expenses from the salary derived from their day job. However, successful entrepreneurs must adopt the practice of paying themselves first. The amount is personal and related to what the business can afford. As an example, assume your lifestyle requires an income of $10,000 per month. If your business yields a net margin of 10%, then your business could support you by generating $100,000 in top-line revenue per month. Put a plan in place to meet that goal.
The ability to pay yourself requires consistent generation of net profit from the business. That means your profit calculation should take into account the indirect overhead costs you pay monthly or quarterly (such as payroll, rent, licensing fees, consultants and other services) as well as your direct costs. It’s essential to keep fixed costs as low as possible.
Take advantage of small business sustainability levers
Having quantified what’s required to achieve your small business goal and pay yourself a reasonable salary, next look at how you can achieve your goal. Begin with examining three levers: your people management, outside resource management, and inventory management.
People management for small businesses
Keep your core team small and effective. Start by building relationships with trusted contractors and freelancers to avoid incurring costs associated with full time employees such as paid vacation and sick leave, taxes, and health insurance. By utilizing part time contractors and freelancers, you can quickly ramp your business up or down as your needs change from week to week. As your business grows, you can increase commitments to an external team until you’re ready to bring on part or full time employees. Stability comes from maintaining a consistent team over time. It’s fine for that team to include loyal contractors that give you the flexibility to scale at a moment’s notice. Once you add full time employee costs to the business, you will need a payroll management system. Look to robust affordable tools like Gusto to manage people, payroll, benefits, and taxes.
Outside resource management for small businesses
Many small businesses achieve scale by leaning heavily on outside resources for expert management in areas such as supply chain sourcing, fulfillment, business operations, and financial management. While these outside resources generally require commitment to a fixed base cost, they are more readily dialed up and down to flex as the size, scale and complexity of the business changes over time.
Inventory management for small businesses
For eCommerce businesses, inventory optimization is one of the most powerful avenues for achieving sustainability. A large portion of capital may be tied up in inventory, so keeping inventory levels “right sized” can pay enormous dividends. The tools for achieving the right balance include seasonal adjustments, inventory management software, and clearance sales. Decisions around sole-sourcing, geographic location, shipping, and promotional strategies can enable an eCommerce firm to thrive while maintaining safety in the event of demand downturns.
Final thoughts on small business sustainability
My intent with this article is to provide an overview on the range of levers through which an entrepreneur can enable their small business to capitalize on the good times, weather the bad times, and keep supporting their family’s lifestyle. In closing, I’d love to hear your comments or requests as I create more articles devoted to small business sustainability, including aspects of managing demand, cash, and capital. I can be reached at eric@onrampfunds.com.
