Success in the mind comes before anything gets started in business, but how much consideration is given to the chances of failure and is there a way to improve those chances? Ray Zinn discusses why businesses fail in this new Tough Things First podcast.
Rob Artigo: Rob Artigo here. Once again, your guest host for this edition of the Tough Things First podcast. I’m an entrepreneur in California. It’s great to be with you again, Ray, for another great podcast.
Ray Zinn: Well, I look forward to this one especially, Rob.
Rob Artigo: I think the first time I ever really heard the stat about the odds of succeeding as a business, when a business launches, there’s odds to whether or not you’re going to succeed. And I think when I was younger, the first stat I ever heard was the extremely low rate of success for restaurants. It’s like 20% chance of success. And I know that we’ve talked about the low odds of success in the tech world here on this podcast, but I thought about this Tough Things First podcast, let’s get into the reasons why businesses fail. Maybe we can hear some cautionary tales out there. Sound good?
Ray Zinn: You bet. So when we look at the failure rate of startups, as we call them, they’re 9 out of 10. In other words, 9 startups fail out of 10. It’s a 10% success rate. And so what we’re going to talk about today is why does that happen? Why is there such a high failure rate? Well, number one is most people who go into business don’t have any idea what it takes to run a business. Just because you have a college degree or maybe a good trade knowledge of a particular subject or product doesn’t mean you’re going to succeed. You have to know how to run a business. And I always recommend, there are three courses, whether you’re going to be a college grad or whether you’re going to be a self-employed trades type person, there are three classes you can take and they’re available at almost every school, junior college or university or online.
And these three courses are, number one is accounting, basic accounting. Number two is business law, which teaches you how to deal with contracts and other legal business problems. Number three is financial and managerial accounting, which helps you understand and read balance sheets and income statements, because that’s extremely important to know how to read a balance sheet and income statement. Some people don’t even know what those are even. Income statement is, of course, how your expenses are relative to your income that you’re getting, and your balance sheet talks about your assets and liabilities. And then lastly is economics as a course that most people kind of roll their eyeballs back and say, “Heck, who cares about economics?” Well, understanding economics helps you understand just how markets flow, in other words, how business cycles go, whether you’re in an up cycle or a down cycle. Why does the feds raise interest rates and then lower them at other times? Economics is extremely important.
So just to reiterate, it’s accounting, business law, financial and managerial accounting, which is reading balance sheets, income statements. And the last one is economics. They just don’t know how to incorporate these subjects in running their company. And so it’s just like somebody who wants to be a dentist, but doesn’t go to dental school. I mean, you wouldn’t want somebody working on your mouth that they hadn’t had the training and the experience to do so. So just because you’re a good welder or a good hairdresser or a good retail clerk doesn’t mean you can run your business successfully. Again, the reason businesses fail is they just don’t know how to run a business.
They’ve had no experience in those particular areas. Now, if you’re an employee, you don’t have to know that. But if you want to be the big Kahuna or the chief or the boss or the president, you need to know these things. So that’s the primary reason these businesses fail is because they don’t know how to run a business. Just because you’re good at hairdressing or good at welding or whatever is the business you want to get into, or even you’re good at designing semiconductors, doesn’t mean that you’re good at running the company. One of the main reasons is just the lack of knowledge in the four basic subjects.
Rob Artigo: And let’s underscore that for a second there. The fact that you mentioned hairdressing, and let’s use that as an example, is you get your hairdresser’s degree. There’s a state license in California, it’s cosmetology. And let’s say, you’re really good at it and you’ve been working the business for a while and you’ve saved up money, put money in your pocket. And you’ve decided that, okay, so I’ve got enough money to buy a hairdressing company, or a business, let’s say, a small business operator’s selling her hairdressing business that includes all her clientele. And you go over and you buy it, but you have no business experience. And I think that’s important to underscore is that even if you yourself has the capital to buy a business, it doesn’t mean you should because you have to evaluate whether or not you can actually operate that business.
Ray Zinn: Well, yeah, I mentioned, just because you’re a good circuit designer doesn’t mean you’re going to make a successful president of a semiconductor company. So as I mentioned, there’s the subjects that I talked about. Then the second one is you have to be able to get along with people. 75% of the people that leave their business or their job and go to another company is because they didn’t like their boss. 75%. That’s the main reason people quit. So you have to be able to get along with people. So you have to have that personality that you’re a people person, that servant leader that we talk about in Tough Things First. If you can’t get people to follow you, then they’re going to leave and go to another company. And of course, then you got the cost of retraining a new person. So that’s the second one is you need to be a people person.
If you’re not a people person, don’t try to run a company because it takes people to run a company. Unless your company doesn’t require people, that’s different. But if you need to hire employees to help you run your business, then you have to be a people person. And if you want to find out if you’re a people person, ask your friends, ask your spouse, ask your parents, your family and they’ll be more than happy to tell you whether or not you are a people person. The second one is that a lot of companies fail because the people can’t work together. In other words, there’s no teamwork, there’s no team effort to strengthen the company. That’s the other important one is just not being able to get along with people as you were or get them to follow you. Number three is that you don’t have the resources, the financial wherewithal to do it.
It’s like buying a car you can’t afford or buying a home you can’t afford or having a hobby you can’t afford. Having a business you can’t afford can also result in your failure. And so, you need to have at least three to six months working capital, which is the money you need to keep you in business as you get the company started. So if you don’t have three to six months worth of capital in your budget, then you’re not going to make it because it takes three to six months, three months on the inside, maybe longer on the outside, maybe a year, a year and a half, I’ve heard up to five years to have the working capital, have the resources to be able to keep your company viable. So, you have to have that staying power, that runway as they call it, to stay in business. So those are the three most important ingredients. Number one, the knowledge of how to run a business. Number two, you’re a good people person. And number three, you have the financial resources or the runway necessary to launch your business.
Rob Artigo: Well, even a lot of small businesses have layers of management, you have tiers to manage, so you have secondary managers and people managing the mail room, for example, or I don’t know if it’s a mail room, but more or less the shipping and receiving area. You might have two employees out there and one of them’s the manager because they’ve got to be the most skilled and most knowledgeable person. But I suppose your team can fail if you have a management team there that is not knowledgeable and fails. So if your management team fails you, then chances are your business is also going to fail.
Ray Zinn: Well, picking the right team is what I’m talking about. That was the second one, a people person. You got to have the right team. If your team is not working together, whether you’re a sports team or whether you’re a business team or yeah, a family. What do they they say? 60% of all marriages end up in divorce. Because you’re not a good team. You didn’t work together. You may be a good person, but that doesn’t mean you’re a good people person. Your ability to compromise, to be able to work with people and understand what makes them tick, as you would, is important to keep your team together.
Rob Artigo: Have you found that a lot of businesses that are struggling or failing have set aside the fact that eventually they’re going to have to market the business or whatever their wares are, and they haven’t really thought through that before they started to launch the business?
Ray Zinn: Certainly, you want to be in the right market. I mean, you don’t want to be making buggy whips if horses are going out of style. I call that the buggy whip phenomenon. So make sure that your market is growing and so you’re in a growing market, not in a descending market. Electric cars is a market that’s growing. I mean, if you go back 10 or 15 years and you talked about electric cars, everybody was poo-pooing them, saying, “Ah, it’s a joke. How you going to go down the street and then you have to recharge the battery?” But now almost every single automobile company now is moving into electric vehicles. You’re going to find electric is the new hot area to get into. So hanging your stars, your wagon to the star of an electric business is a good one because that’s a very growing business now, or any business associated with reducing carbon emissions or that sort of thing. Again, make sure the market you’re going into is a growing market.
Rob Artigo: All right. So make sure you get the education, according to your recommendations at the beginning there, can cover a lot of the areas that we see people failing, that they probably will learn about that and be aware of it and be ready to operate a business if they just do those, take those three classes you were talking about to be prepped.
Ray Zinn: Or at least read my book, Tough Things First, because I do cover all those various items and give you some sense of what you’re going to need to run your business that I cover in the book Tough Things First.
Rob Artigo: Yeah, that’s not just a refresher course there, that is an essential reading tool for getting through the first part of becoming an entrepreneur. So doesn’t matter how old you are or young you are, you can benefit from the Tough Things First book. So for our listeners, please rate this podcast on your favorite platform. And as always, you can reach out to Ray Zinn with your questions at toughthingsfirst.com. You can find all the social media links there. He also has blogs and links to information about the book Tough Things First. Also, pick up the Zen of Zinn series. You can pick up Zen of Zinn, Zen of Zinn 2, and soon to be Zen of Zinn 3.
Ray Zinn: Yep. And keep helping us be the number one podcast for business.