Last week there was a good article in the Wall Street Journal about Radio Shack’s struggles to avoid bankruptcy and remain solvent as a business. Although Radio Shack is by no means a small business, the trouble the company is facing is a good case study in some key points related to small businesses.
First of all, the company’s struggles are a good reminder of the various risks that businesses of all sizes face. Changing consumer preferences, new technologies, and financial headwinds are just a few of the many challenges and pitfalls that small businesses and their larger counterparts all have to navigate.
Second, this situation is a good reminder that bigger isn’t always better when it comes to small business growth. Radio Shack had become one of the biggest retailers in the world during its steep growth trajectory throughout the 1990s and early 2000s. However, the company’s growth has stalled in recent years and has instead been experiencing negative growth, fewer customers, and financial losses.
Now, instead of looking for ways to grow, increase it’s number of stores, and generate higher revenues and profits, Radio Shack is looking for ways to downsize the business to return to profitability. The company had built its infrastructure, fixed costs, and overhead to scale the company to its peak size several years ago, which is no longer feasible given the company’s free falling sales and profits.
Not all of us aspire to build startups and small businesses that reach the size and scope of Radio Shack, but most of us have dreams of building businesses that are bigger than us. Continuous growth is often a reflection of a solid product or service and viable business model, so small business growth is a goal worth reaching for.
However, there are times throughout the small business growth cycle where it makes sense to take a few steps back in order to take even more steps forward. Most businesses hit rough patches along the way or experience declining revenue and profits at times – even if those declines are just temporary blips before returning to growth.
In other cases, as is the case with Radio Shack, a company’s business model has become so obsolete that the company has to either completely overhaul its business model or scale back the company to figure out ways to become profitable in the new reality of being a smaller company that originally envisioned. While it may not be the ideal situation, it is often better than the alternative of going out of business.
With this backdrop in mind – combined with the fact that most small businesses realize major challenges or ultimately fail along the way – there are a few small business lessons we can take from Radio Shack to help build companies that can withstand the various landmines associated with growth:
Limit fixed costs wherever possible. Even when times are good and finances are stable, it is important to build your business to prepare for inevitable road bumps and downturns. The more you can limit fixed costs and build variable costs into your ongoing costs, the better prepared you will be for financial declines in the future.
Maintain tight financial controls – especially during small business growth stages. They say that profit and money can hide a lot of warts, meaning that profitability can hide a lot of inefficiencies and poor financial controls that will become liabilities when your business hits rough patches. It is important that you always maintain high margins, liquid assets that exceed your liabilities, and other steps to financial discipline that will ensure your business is healthy enough to sustain difficulties n the future.
React quickly when times get tough. Small business owners are notorious for waiting too long to respond to downturns. Whether it involves reducing staff, cutting costs, or reigniting revenue growth, you don’t want to wait until it’s too late before taking corrective action.
While it’s nearly impossible to completely avoid the business challenges that most startups and small businesses face, it is possible to build a company that is healthy enough to address and survive those challenges. The above three steps are just a few ways that you can do the same for your small business.