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The Joys (and Dangers) of Owning a Microbusiness

Today, there are about 27 million businesses in the United States. Of these, the vast majority are what we call microbusinesses, those that typically have fewer than five employees and less than $1 million in sales. This was where I started my business career and, after having gone through all three stages of business growth, I'm happy to be back there again today with my wealth management and consulting business.

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I love being a microbusiness. I have few worries about capital investment, little need for bank loans and no concerns about taking care of a large group of employees. I am able to concentrate on serving clients and don't spend a lot of time on administrative duties.

Lumpy Sales

Of course, when I'm not able to work, my business suffers. If I were unable to work for more than six months, the business would have a hard time surviving. That's the biggest down side, one I experienced while going through my cancer treatment four years ago.

The other big challenge with a microbusiness is lumpy sales — when your sales go up and down in a significant way. You move between extremes. One day you're so busy serving customers you don't know what to do, and a week later you're trying to figure out where your next job will come from.

That's what happens when a microbusiness owner tries to do everything. Among other things, the microbusiness owner is the marketing manager, the sales representative, the service provider and the person who runs the company. It's the moving from doing work to landing work that causes the roller-coaster ride in terms of cash coming in the door.

Cash Flow Is King

Cash flow is king in most small businesses, but this is especially true for those with fewer than 25 employees. Research from Open at American Express shows that about 50 percent of small businesses experience cash flow strains, mostly because they aren't creating enough in extra profit to allow them to put cash away for a rainy day.

If your business doesn't have enough cash, you will be under stress. That is something I can attest to from first-hand experience. When you don't have enough cash, you feel pressure to take any client who walks in the door. But this is usually a mistake. Trying to be all things to all people will cost you money.

Most owners understand this. But when you are under pressure to pay your bills, it's hard to say no — even if the customer is outside of your target market. You need money, you take the business, and you often end up spending an inordinate amount of time serving the customer. And if you stay in this cycle, you put your business at risk. When you own a microbusiness, burning time is just like burning money.

Several years ago, I did some work with a graphic design firm, Gray Cat Studio. Michelle Bisceglia, the owner, had built a knowledge base working with specialty food manufacturers. She knew a great deal about the businesses and what made them successful.

When I first started working with her, she would take work from anyone. She often lost money when she went outside her knowledge area, but like many microbusiness owners, she was often short on cash.

We worked on developing her niche and I coached her in using a new word: No. Over time, two things happened. She was able to charge higher fees because of her expertise, and it took her much less time to complete projects. This allowed her to create a cash cushion, which made it even easier to say no to customers who didn't fit her profile.

Two Paths for Microbusinesses

Ultimately, microbusiness owners have two choices. They can choose to remain a microbusiness, like Ms. Bisceglia, or they can do what I did in my previous business and move into the next level, the traditional small business. In both cases, understanding the drivers that create cash for living and saving is crucial. If you want to grow, you will not only need to finance your own living needs and retirement savings, but you also need to create cash for growth.

There is no good or bad about this decision. It's truly about an owner's preferences. Some people decide they want a bigger business, and some are happy just doing what they want without having to worry about managing other people.

If you choose to stay at the micro level, you need to understand that lumpy sales exist and you must have a strategy for dealing with them. You should have a plan in place in case you become disabled. You should have a strategy for saving for retirement, because you will not be able to sell your business.

What do you think? If you're a microbusiness, what are your challenges? Have you decided to stay at this level?

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on wealth management issues.

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