The Balance Sheet

How to make better decisions as a small business owner

If you own a small business, you'll know that bad decisions have big consequences.

At huumans we're pretty realistic. We like to think we talk truthfully about the reality of running a small business, with all the ups and downs it inevitably brings. We're a team that have done it before, and that's why we're passionate about small business support. We know it's hard, confusing and sometimes lonely to go into the world with an idea and build something new, and we have the upmost respect for anyone who takes that journey.

Without wanting to pile doom and gloom on top of the already challenging nature of small business ownership, the daily reality is that most small business owners are increasingly having to do more with less. They have shallower pockets than big business and shallower pockets themselves after the last few years of unprecedented challenges. They have less of a buffer or safety net. They have increasingly less wiggle room. They have less support. They don't have the luxury of making mistakes.

Mistakes, as we all know, mean a higher chance of failure. We know that 80% of small businesses fail in the first year. We know that around 50% of small businesses fail by year five. We know that really, that failure, as you'd probably expect, ultimately comes down to a lack of cash flow - or as your bank manager would call it - liquidity.

Liquidity - or the lack of it - inevitably comes down to decision making, and the outcomes of those decisions.

There are 10 main reasons why small businesses fail, and they're relatively well known and talked about. None of these reasons are a singular failure point in a business, but they tend to spiral, combine and eventually - if left unchecked - begin to terminally undermine liquidity.

A lack of business planning
Failing to understand your customer
Mismanaging your inventory or processes
Growing too quick without the means to fund that growth
Not selling enough products or services to be sustainable
Being overwhelmed by doing everything and not delegating
Refusing to change direction when you need to
A lack of business data, or understanding of that data
Poor management (of people, of money, of time, etc)

Most - if not all - business owners will recognize at least one thing on this list that they're guilty of, and this is one great reason to immediately reach out, if you haven't done so already, and find a mentor who has started, run - and maybe even failed - a similar business. Go stand on the shoulder of giants - the weather is better up there. Because if a business owner - like anyone doing something new - is expected to make mistakes (after all, making mistakes is how we all learn) but those expected mistakes lead to a real possibility of failure - how does anyone succeed? This, of course, is the inherent unfairness in running a small - or indeed, any sized - business; that to be successful you have to have failed a little first.

Failing a little isn't really a possibility for most early stage businesses, especially if you're like the majority of owners who are coming into business ownership for the first time, without the financial bandwidth to experiment and facing a business knowledge gap of quite considerable depth.

So what do you do? How do you get into the 20% of businesses who survive? How do you take your big idea, limited financial bandwidth and patchy business knowledge and avoid making bad decisions?

There are 4 key things any small business owner could be doing now to improve their decision making, and while this won't directly solve for a lack of sales or customers, it will certainly nudge the dial moving forward. These are 4 things that small business owners constantly - and consistently - forget about, and yet they always show up as a key contributor to terminal liquidity.

Understand what is Known, a Known Unknown and an Unknown Unknown

Consider and truly understand what you know and what you don't know. Make sure what you know is actually true (this is more important than you'd expect as everyone suffers from bias) and that that truth is truthful now (rather than truthful last year). Working out what is true is not easy. Do not just presume the facts and figures you're using are truthful or current. Constantly question them and reassess their value to your business.

Now think about what you don't know. Of this - what do you know you don't know (Known Unknown), and what do you not know you don't know (Unknown Unknown)?

For example, and example of a Known Unknown might be:

"I know taking the lease on this premises would cost X, and looking at comparable data from other businesses in this area I could expect an increase in sales by Y. But I don't know if this will directly relate to an increase in profits"

Yet an example of an Unknown Unknown might be:

"I don't know if my business would benefit from a physical location, and if it did, I don't know if this would directly relate to an increase in profits".

Known Unknowns typically can become fully known through research, data and support. It's managed risk which you can directly influence, usually through some sweat equity and networking. It can also be a mitigated risk in the sense that if you do make the decision to go ahead, you know what you don't know - so you know where the threat is going to come from, and you go into the decision with that understanding and expectation.

Unknown Unknowns are something you should avoid and not spend time on. If you have a lot of Unknown Unknowns in your business, or they outnumber what you know - then something is wrong and you need to stop and reassess your business strategy. Unknown Unknowns have a tendency to 'come out in the wash' as it were. As you grow your business, you'll become more atune to how decision making - and the time when decisions need to be made - develops into something of a fortuitous cadence. That is to say, if you focus on what you know, work on understanding what you don't know, then the Unknown Unknowns naturally, as your business unfurls and the knowledge of your business increases, transition to Known Unknowns or become completely irrelevant.

Focus on making decisions on what you know, identify what you know you don't know and work at understanding it until you know it. The rest will work likely itself out.

Understand the difference between an important decision and a normal decision

It's not just making a bad decision that is problematic. What can be worse is decision paralysis. If you're unable to make a decision and obsess about the possible outcomes, this can be equally as destructive to your business. Luckily there are ways to reduce decision paralysis, and if it's any comfort, it's a problem even the worlds biggest corporations struggle with.

A good example of breaking decision paralysis is using some thing called 'The Two Door' method, which is a popular tool at Amazon when seemingly big decisions are struggling to be made.

There are two doors. Your decision has to pass through one of them.

Door one is an outcome which is low risk, low complexity - and if it all went wrong, you can likely resolve it quickly and cheaply with a phone call, some late nights, maybe an apology, and you'll be back to where you were before you made the decision in maybe a week or so.

Door two is an outcome which is higher risk, middle to high complexity, and if it all went wrong, it's going to be very difficult to resolve it. It might be very expensive, it might have a contract associated with it, penalties, fines and it could take months to recover from.

Regardless on the possible upside of a decision - even if it could potentially return huge profits - your decision should be assigned a door. Door one decisions, you can make them quickly. Yes or No. Make the call based on the facts you have now. If it goes wrong, it's annoying, but it's fixable. Door two decisions will have big impact and they deserve deep thought, which will take time. Time is good, and while time might not make the decision any easier, with complex decisions, time has a habit of providing context and clarity that was previously missing.

Understand your data

Every bank transaction, every sale, every interaction in your business generates data, yet very few business owners really scrutinize that data and understand it in any real depth. You may obsess over your Shopify reports or your bank statements, but this does not translate to you understanding your real-time Cost of Goods Sold, Profit Margin, Debt to Asset Ratio and Free Cash vs Liabilities.

Understanding your data is really about increasing your business knowledge, and increasing your knowledge will make decision making easier and more accurate. Get to know your business numbers, understand them, consider how they change and fluctuate over time, watch as decisions you make impact them.

The great thing about understanding your data is that not only does it put you in a great position to make a decision with more confidence, but your data will give you an early sense of if that decision was the right decision; and if it was the wrong decision, give you a head start in rolling it back and understanding why it was the wrong decision.

Understand your strengths

Much like understanding what the Unknown Unknowns are in your business, understanding what your interests, strengths and passions are is really about trying to figure out what the gaps - and what the weaknesses are - in your day-to-day approach to your business. Be honest with yourself about what you enjoy and accept that the things you dislike you'll probably put off or do with the minimum effort. Accept the things that you love you'll excel at, and it's those things that will drive your business forward.

If you're not a numbers person, if the thought of doing your books makes you stressed and sad - do yourself the favour and get someone to do that for you. If you have no idea how to digitally market your business and it's integral to your businesses success, find someone who has the skills and passion in this area and delegate that task to them.

These delegations of tasks cost money, but you should consider them in terms of an investment in your business growth. If they're not in your business plan, add them. Work out how much time you spend doing them (badly) and then cost that time. Is that money you're spending on yourself worth it? Or is it better spent on an expert who can not only do the service, but support, advise and propel both your business - and your own knowledge - forward.

With more expertise in your business, more people supporting you on the critical pieces, you can remove yourself from some of the burdens and deep knowledge requirements, allowing you to make decisions based on accurate data and expert advisory.

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Rob Boynes is the Co-Founder of huumans

What is huumans?
A smart, cost-effective bookkeeping service designed specifically for small business owners, huumans provides same or next business day support, guaranteed weekly reconciliation and fixed, transparent monthly pricing. Your business numbers, directly calculated from your constantly reconciled accounts, are presented in a free, easy-to-understand, on-demand, shareable dashboard - and like your billing, it can be managed online whenever you find it convenient. Offering the most cost effective small business managed payroll services in Canada, we also provide specialized discounts for startups and new businesses, along with dedicated solutions for franchises.