Beware The Law Of Small Business Numbers
Over the hill and through the woods, a rabbit was barely staying ahead of a fox that was keen on having the rabbit join him for dinner.
Running for his life, the hare made haste across a small stream and hopped over a turtle. Tucking neatly and safely inside his shell so as not to become collateral damage in the rabbit’s emergency, the turtle inquired about his anxious neighbor’s prospects. “Hey, Mr. Rabbit. You gonna make it?” To which his hurrying, furry friend replied over his shoulder, “I GOTTA make it.”
If you ask small business owners which cast member of this little vignette they’re most likely to identify with, they will invariably relate to the cottontail. And that response would have been the same even …
... during the halcyon days pre-2020;
... before small business owners complied with unconstitutional shutdown orders, knowing that such a concession could set them on a path to ruin;
... prior to governors and mayors ordering customers to stay away from small businesses – indefinitely;
... previous to the pandemic, when every challenge could be a game-changer, with no better than 50:50 odds of not being eaten.
There’s a reason why the success:failure ratio of small businesses has historically been so much more tenuous and dramatic than for Big Business. And that reason – increasingly in evidence as we transition from mid-pandemic survival to post-pandemic expansion – is found in The Law of Small Business Numbers: “Whatever you need, there usually isn’t enough.”
Let’s look at just three elements of this law that demonstrate why the numbers are against a small business maintaining a safe distance between fulfilling their dreams and, well, you know.
Customers
On Main Street, the Pareto Principle – 80% of your business comes from 20% of your customers – is alive and even more dangerous here. Big businesses have thousands, maybe millions of customers, so losing even a big one doesn’t put them in peril. But, relatively speaking, a small business’s customer base is a short list, inside of which is an even shorter one – likely no more than three customers, but more likely just one – that represents a dangerously high percentage of total revenue and profit.
Alas, it’s the rule rather than the exception that the loss of a certain customer – sometimes even an individual sale – can take enough of a mathematical bite out of the backside of any small business to put it in danger of being taken down from behind.
As you retool and redeploy post-pandemic, beware the perils of Pareto.
Employees
When an employee leaves a big business, there are probably three replacements on the bench. But a small business is lucky to have a single replacement on a tiny stool because there are always more jobs to do than people to do them. Everybody knows that. Consequently, every small business employee is a key employee, which puts extra emphasis on hiring as a strategy rather than a box to check.
As you staff for post-pandemic opportunities and evolving customer expectations, understand that The Law of Small Business Numbers has been magnified by a shortage of qualified employee candidates which is now a systemic crisis. The high-percentage play to increase your odds of success and survival is to practice patience, deliberation, and as much hiring sophistication as you can. Hire for quality, with emphasis on intelligence, capability, and attitude, and less focus on experience.
Going forward, your bench will expand with highly qualified people who are products of your organic training program.
Capital
Big businesses are blessed with multiple capital options, including the equity and debt markets. A small business is regarded less by capital markets than a gnat is to a hungry fox. Other than bank loans and earnings retained after taxes, the rest of a small business’s capital options are the twin brothers of desperation, Slim and None.
Yes, sometimes outside investor capital is an option, but those funds come at a premium, with parameters and covenants most founders find too expensive and onerous.
With the capital twins, perilous percentages, and limited options against them, small business owners who survive the capitalization race ahead of marketplace perils are the ones who dig deep to find a visceral “I GOTTA make it” resolve.
But resolve alone isn’t enough. To overcome The Law of Small Business Numbers and open the gap between you and desperation, a survival alloy must be forged from the grit of resolve, all available resources, and operating fundamentals like these:
• Customers: Know what each customer expects from you – especially post-pandemic expectations – and over-deliver that. Your special sauce can defeat the big-number momentum of Big Business.
• Employees: Hire only those who could one day take over when you go on vacation and eventually even buy you out.
• Capital: Build and maintain good relationships with at least two banks – with one being a community bank (this is non-negotiable) – and retain earnings like your business’ life depends on it. It does.
During The Second Punic War (218 BC), Hannibal crossed the Alps with 35,000 men and a squadron of elephants. When snow closed the passes, scouts reported the way forward was impossible. Sensing disaster in the eyes of his men, and realizing that this was a test of his leadership, the great Carthaginian general is said to have uttered these words: “We must either find a way or make one.”
Out here on Main Street, that sounds like “I gotta make it.”
Write this on a rock ... Rabbits, generals, and small business owners defy the numbers with grit and fundamentals.
Jim Blasingame is the author of The 3rd Ingredient, the Journey of Analog Ethics into the World of Digital Fear and Greed.
