According to the Small Business Association, only 7% of businesses make it to 7-figures per year; the majority, 29%, earn less than $25,000 per year. With such a small percentage of businesses actually making it to 7-figures, does it seem worthwhile to pursue the goal knowing that there is a 93% chance that you won’t make it?
The number one reason people start a business is to attain freedom and be their own boss. The reality is that the average small business owner ends up with an income of $65,486 and not the riches they think will create the freedom they desire. Comparatively, the average household income in America is $79,900. In other words, many households with two people working as employees outearn the average small business owner. With these disheartening statistics, why is it that there are over 500,000 new businesses starting every single month?
As someone who has built and consulted to seven, eight, and nine figure businesses, there are several key reasons why people do not grow their annual revenue to a million dollars or more and these shed light as to why it takes more than luck to reach the rarefied air of seven figures.
Here are the top 3 reasons why businesses fail to make it to 7-figures:
1. They Do Not Pay Attention to Cash Flow
82% of businesses fail due to poor cash flow. To achieve the 7-figure, and beyond mark, having ample cash flow is essential. This also means having true financial literacy. In RadiusAI, a company that I am a cofounder of, we have a cash flow report from our CFO weekly. We have a responsibility to our employees and our investors to be good stewards of money and it is impossible to manage what is not being measured.
When I am asked to advise startups, I ask them if they have a cash flow statement. For me, this is non-negotiable. If someone can’t understand their accounting, they will never understand their business. Looking at the cash flow statement may get disheartening however it helps to keep a business on track, make the right decisions in terms of spending, and realize what the deficit is.
For a business to make it to 7-figures, having a part-time CFO can be extremely helpful. The CFO’s role is to provide insight into the financial health of the company, assist with projections, and possibly make recommendations. A CFO should be up to date on the latest tax changes and be able to take advantage of opportunities such as tax credits.
In 2020, when the government in the US offered small businesses forgivable loans, our CFO, Chris, had the application in so quickly that our banker let us know we were one of the first to get it in. As a result, we received some much-needed help because he acted so quickly while others lacked the understanding and the ability to get their applications done.
Small businesses need cash. They need to understand the difference between profit and revenue. To get to 7-figures, they will have to defy the odds and that means a solid understanding of cash flow.
2. They Lack of Understanding of Their Market
Have you ever watched an episode of Shark Tank and cringed when one of the sharks asked the business owner if they had looked at their competition only to have the business owner say something naive like, ‘there isn’t anything on the market like what I have.’
Okay, there is always something similar to what you have. There are other restaurants, coaches, e-commerce businesses, nutritional products, and so forth. People who grow a 7-figure business understand that not only will they have competition, they do have competition, and they have to be better than their competition.
Every good pitch deck for a startup has a competitive chart that illustrates that company’s features versus their competition. The competitive analysis should be updated every 90 days as new players come on the market.
7-figure business owners do not fear their competitors, they look to them for ideas. Take for example Apple. Apple doesn’t fear Samsung, they look at Samsung and ask themselves how they can do things that are more streamlined so they can take market share. Apple sees Samsung as a competitor but also a source of inspiration.
Understanding the size of your market, the demographics of your buyer, the cost of your product compared to your competitors, and being able to address the potential threats to your product or service such as supply chain issues or lack of need is essential to growing a 7-figure business.
3. They Focus on The Wrong Things
Small business owners wear many hats – sales, marketing, accounting, legal, and sometimes – manufacturing. It is easy to get caught up focusing on what seems to be important however there is a massive difference in importance and essential.
All businesses, regardless of the size, must have a daily focus on lead generation. Dave Ramsey, famed author of The Total Money Makeover, and at the helm of a $600 million empire that includes several podcasts, courses, real estate, and more, writes in his book, Entreleadership, that hiring a good sales person is one of the most important things a small business owner can do. In other words, if you can’t sell, you need someone who can sell you.
In our company, RadiusAI, I am in charge of sales. I also help steer several other departments however I am keenly aware that without sales, the company doesn’t exist. Part of my daily focus is to keep a healthy stream of leads in the company. For Radius, our customers are enterprise level multi-billion dollar corporations and that also means that my focus to engage their decision makers is not going to come from posting my latest dog photo on Instagram. Our prospects are on LinkedIn and they like to meet face-to-face, see demos of our software, and understand why an investment in our technology is good for their bottom line. With that being said, in order to grow the company, I have to know where to focus and where not to focus.