Small Business Owners: The Disadvantages

Stress

Small business owners may encounter significant stress due to the high risk of running a small business and the wide variety of competencies required of the job.

Learning Objectives

Understand the distinct trade off in owning a small business, most notably when it comes to stress

Key Takeaways

Key Points

  • While owning a small business is a great way to free yourself from working for somebody else, it comes with a few disadvantages as well.
  • Running a small business can easily cause a great deal of stress, primarily due to the fact that the owner is taking all the risk (and thus all of the consequences, be they positive or negative).
  • Small business owners are also expected to wear many hats, and fill a wider variety of functions than a regular employee would normally be asked.
  • When hiring employees, the small business owner is now also responsible for their well-being. Owners with employees must be leaders, and they must manage complex HR processes (or outsource them at a cost).
  • When considering starting a company, one should first assess their comfort with uncertainty and risk, as well as their ability to maintain calm in complex situations.

Key Terms

  • ambiguity: The state of being unclear or unable to measure.
  • risk aversion: This is a characteristic of individuals who are not comfortable with uncertainty, particularly when capital is on the line.

Why the Stress?

Being a small business owner creates a great deal of freedom, but that freedom comes with some cost. There are various ways to define the difficulties small business owners confront, but the term stress manages to cover a fair bit of the disadvantages small business owners face.

Risk and Return

As the sole owner and operator, all of the risk and all of the return rests on the shoulders of the small business owner. As a result, the small business owner has greater control of the process, but faces much greater consequences for failure and a higher vulnerability to chance. The upsides are higher, the downsides are lower. This basic principle of risk and return can generate a great deal of stress for people aiming high in their own start up ventures.

To be slightly more specific, Frank Knight and Peter Drucker define entrepreneurship in terms of risk-taking. They point out three types of uncertainty encountered by start up owners:

  • Risk – Measured statistically and often planned for, risks are simply the probabilities of unfavorable outcomes compared to the desired objectives.
  • Ambiguity – A risk that is not measurable, ambiguity is the scenario in which objectives and relative risks are known, but not the likelihood of an outcome.
  • True Uncertainty – The worst of all is true uncertainty. The objective is known, but the context of risk is completely unknown.

Any of these three risk scenarios are stressful for many people, and it it is important to understand your own risk aversion before entering into a small business ownership situation.

Competencies Required

In addition to taking all of the risk, small business owners and entrepreneurs are also often tasked with wearing a lot of hats (i.e. working tons of different roles within the organization). As businesses grow, they often become more complex. As that complexity rises, small business owners rarely have the excess capital to invest in a proper team. As a result, they often end up trying to fill as many roles as possible. This requires both a great deal of energy, and a wide variety of competencies. Developing these skills and applying them every day can be both tiring and stressful.

This is a simple chart that graphs the six steps a start up owner will go through in order to establish a small business. Ideating, concepting, committing, validating, scaling and establishing all require different competencies and capabilities, which the start up owner may have to accomplish herself (or with a small team).

Starting A Business: This is a simple chart that graphs the six steps a start up owner will go through in order to establish a small business. Ideating, concepting, committing, validating, scaling and establishing all require different competencies and capabilities, which the start up owner may have to accomplish herself (or with a small team).

Employees

Another source of stress is the simple fact that employees will be relying on the business owner (if it is a business with a small team). These employees will have needs the leader must fill, and the success of the organization will have a great impact on their job security. Worrying about oneself and one’s success is one thing, but worrying about the livelihoods of the team is another entirely. This can be a great source of stress, depending on the situation.

Other Factors

While these are a few key contributors to stress, it is also worth noting the likelihood of inconsistent revenue (and therefore salary), personal liability (the risk of losing whatever start up capital the business owner invested), payroll, taxes, managing stakeholders (if applicable) and a wide variety of other responsibilities and tasks which can contribute a stressed mentality.

Small business owners therefore benefit greatly from a naturally calm disposition, comfort with uncertainty, and a natural knack for learning multiple competencies and balancing a wide array of responsibilities.

Low Success Rate

Small Business Administration statistics show that one-third of all new businesses fail after two years, and 56% fail after four years.

Learning Objectives

List the 10 most common problems entrepreneurs face when starting a new business

Key Takeaways

Key Points

  • Most businesses fail because they lack enough cash at first and take on excessive debt as a result.
  • Cash on hand is king! This needs to be the golden rule for start-ups and small businesses. Many entrepreneurs and small business owners have a fundamental misconception of how business operates.
  • When the going gets tough, small businesses fail. In part, that’s because most start-ups and small businesses fail to set aside cash reserves that can be tapped into when the market sours.
  • Too many owners grow their business too quickly without really determining whether they should, or even whether they can afford it.
  • Too many retail owners are not savvy negotiators and sign what they think are “cheap” leases. Consider all factors before signing on the dotted line.
  • Too many times start-ups and small businesses lack any type of work process necessary to ensure that things are done consistently. Poor controls and unclear processes can lead to quick failure.
  • 7. Poor or No Business Plan. If you fail to plan, you’re planning to fail. A well drafted business plan is your road map to success. If nothing else, having to write a business plan forces you to think about the what, when, where, how and why of your business.
  • 8. Ineffective Marketing and Self-Promotion. People can’t buy what you have to offer if they don’t know it is available. Many small businesses fail to develop an effective marketing strategy, or set aside enough money to implement it.
  • 9. What Competition ? Loyalty is earned not bought. An existing customer who is willing to purchase your product or service again is your best customer. Establishing relationships with customers is vital.
  • 10. Failure to Accept, Nay Encourage, Change. Those who don’t adapt… die. Stay alert. Recognize opportunities and remain flexible to adapt to changing times. Better yet, drive the changes.

Key Terms

  • Competition: Competition in biology, ecology, and sociology, is a contest between organisms, animals, individuals, groups, etc., for territory, a niche, or a location of resources, for resources and goods, for prestige, recognition, awards, mates, or group or social status, for leadership; it is the opposite of cooperation.
  • Promotion: Promotion represents all of the methods of communication that a marketer may use to provide information to different parties about the product. Promotion comprises elements such as: advertising, public relations, personal selling and sales promotion.

According to the Small Business Administration (SBA), thirty-three percent of new small businesses fail within the first two years. Fifty-six percent fail within the first four years. You can increase the odds of success by knowing the 10 common problems small business owners face.

Not Enough Cash

Most businesses fail because they lack enough cash at first and take on excessive debt as a result. Before you set off on your adventure, make sure that you have sufficient cash to operate for the next 12 months, using your worst case scenario.

Spending Too Much, Too Early

Cash on hand is king! This needs to be the golden rule for start-ups and small businesses. Many entrepreneurs and small business owners have a fundamental misconception of how business operates. As a result, many spend their seed money, or start-up capital, before revenues start rolling in.

No Rainy Day Cash

When the going gets tough, small businesses fail. In part, that’s because most start-ups and small businesses fail to set aside cash reserves that can be tapped into when the market sours.

Growing Too Big, Too Fast

Too many owners grow their business too quickly without really determining whether they should, or even whether they can afford it.

Location, Location, Location

Too many retail owners are not savvy negotiators and sign what they think are “cheap” leases. Consider all factors before signing on the dotted line.

Inexistent Internal Controls or Poor Execution of Existing Controls

Too many times start-ups and small businesses lack any type of work process necessary to ensure that things are done consistently. Furthermore, small business owners and entrepreneurs generally lack the experience and skills to hire the right people, monitor their performances, and deal with them when they don’t work out.

Poor or No Business Plan

If you fail to plan, you’re planning to fail! A well-drafted business plan is your road map to success. If nothing else, having to write a business plan forces you to think about the what, when, where, how, and why of your business.

Ineffective Marketing and Self-Promotion

People can’t buy what you have to offer if they don’t know it is available! Sounds logical? Yet many small businesses still fail to develop an effective marketing strategy, or set aside enough money to implement it.

Competition

Loyalty is earned, not bought. An existing customer who is willing to purchase your product or service again is your best customer. Don’t lose him or her. Make sure that your customer has a reason, or better yet multiple reasons, to continue doing business with you instead of your competition.

Failure to Accept Change

Recognize opportunities and remain flexible to adapt to changing times. Better yet, drive the changes. This holds especially true for your work processes. Constantly ask yourself and your employees, if you have any, what is working and what is not. Always question how things are done and wonder how they could be improved.

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Business Failure: Everything must go