Is Your Small Business A Zombie?

Zombie busi­nesses are out there, and whilst they aren’t exactly coming to eat your brains, it takes brains to avoid sharing their fate. Your small business may even already be a zombie business — or slowly becoming one, without you even knowing it! If that doesn’t sound healthy, that’s because it isn’t.

What Is A Zombie Business?

A zombie company is a business entity that barely manages to stay oper­a­tional. It may earn just enough to keep running or may rely heavily on lenders to stay afloat, but isn’t earning enough to pay for its own growth, or to reduce its debts. That often puts it just one unlucky event away from col­lapse — making it a high-risk pro­pos­ition for investors.

To be fair, most busi­nesses start like that. The danger lies in staying like that — as many self-funded startups do. It’s a simple mistake to make, and even large firms can fall back into that state. So why does it happen, and how can you avoid it?

How To Create A Zombie

Creating a zombie business is easy. All you have to do is start it up, then starve it near to death. The less you invest in growth, the more you’ll struggle to recoup that investment, and the sooner you’ll have a zombie. Just focus on the price of invest­ments. Ignore their potential benefits — and the oppor­tunity costs of not investing — and you’ll have a zombie business in no time.

…but why on Earth would you do that?

Well, because most busi­nesses take a year or more to become prof­itable. So by then, the temptation for sole traders and small part­ner­ships to take every penny it makes over its running costs as per­sonal income can be unbearable. Whilst under­standable, that’s often where the rot sets in.

Early Warning Signs

Even a zombie business might gen­erate an income you’re com­fortable with. What it can’t do is pay down its debts, afford mar­keting to increase that income, or survive adverse events without incurring more debt.

If you’re strug­gling, those are obvious problems — and you’ll be tempted to groan that you “can’t afford” mar­keting. Which, as we’ll see below, isn’t true — and as you can’t grow without mar­keting, you actually can’t afford not to do it.

If you’re com­fortable though, that early-warning groan can be replaced by sighs that you “don’t need” mar­keting. Still, even if you don’t need to grow any more, your business does, just to protect what you’ve already achieved. Without growth, your market share will gradually wither away, whilst inflation will increase your costs and reduce the value of that “com­fortable” income.

Sure, after all the effort of starting a business, it can be a relief to reach what feels like a comfort zone again. It’s fine to take a breather, but remember — nothing grows in a comfort zone. It’s a place where busi­nesses stagnate and slowly decay. So beware the sed­ative lure of comfort, at least until your business is debt-free and healthy enough to grow on its own.

How To Avoid Becoming A Zombie Business

Your business is a money-making machine. So investing in growing it to the point where it can pay down debts and become more stable should be a no-brainer. That’s all you need to do to avoid business undeath.

Sadly, first-time entre­preneurs are often too focused on cost-cutting to see that the money they save won’t achieve any­thing unless they invest it. It will either just get eaten up by day-to-day expenses and frivolities, or lan­guish in “savings” accounts whose interest may not even keep up with inflation. That just turns taking a risk for a potential reward into accepting a certain loss.

Naturally, when you’re strug­gling, it can be hard to find the fin­ances — or con­fidence — to invest in growing your money-making machine. Still, “hard” is not “impossible”. So first, figure out which of those you lack. Then focus on fixing that.

Curing Zombification With Braaains…

If the problem is just finance — and even if you can’t afford more debt — the good news is that you can probably fix that. You’ll need to invest time and effort instead of money, and growth may be pain­fully slow. Still, low-cost and no-cost strategies like blogging and net­working can help if you do them well enough.

Otherwise, you may need to take a part-time job for a while to refinance your dream — but this time with more clarity. You’ll need to keep investing in it until it can pay for its own growth. Until then, don’t take more out than you need to survive.

If the problem is con­fidence — it’s time for a re-think.

“Gut instincts” are worthless here, as those are already telling you to quit — and pos­sibly to per­severe at the same time. There’s no way out of that without stats — aka “metrics” or “meas­ure­ments” if you don’t like maths. Either way, you won’t get any­where without them. Luckily, pro­fes­sionally built web­sites gen­erate loads of them.

Doubts Fear Facts

Now, stats can seem over­whelming, but here’s the key — you’re looking for trends that appear over several weeks to several months. Day-to-day changes rarely mean any­thing. So you need to see the stats as graphs, and to be able to drill down into details to see what you need to fix. Again, pro­fes­sionally built web­sites gen­erally provide these fea­tures. Still, it also helps to get com­fortable with ana­lysing stuff in spread­sheets — or to get help from those of us who are.

For instance, the two most critical “Key Performance Indicators” (KPIs) for web­sites are:

• How many vis­itors your site gets — if this is low, plan more pro­mo­tional mar­keting (SEO, content mar­keting, paid ads etc.)
• How many vis­itors make enquiries — if this is under 1%, either improve your offer or how it is presented

Stats can often lead to dif­ferent con­clu­sions depending on how you look at them, so don’t just let them confirm your assump­tions. Can they dis­prove them, or reveal things to fix? Are your KPIs really trending down, or are you just being impa­tient? Persistence is a huge part of success, so have con­fidence in your business unless you can identify problems that you cannot fix.

Either way, jus­ti­fiable con­fidence is far more sus­tainable than gut instinct — and with enough con­fidence, fin­ancial problems can often be solved.

Don’t Risk Becoming A Small Business Zombie

Businesses of all sizes can become zombies. Companies like General Motors, American Airlines and Macy’s are often cited as big-business examples. The good news for small busi­nesses is that it gen­erally takes less investment to grow a small turnover than a large one. A common rule of thumb sug­gests investing about 5% of turnover in mar­keting to maintain your market share, or around 10%-20% to grow it. For big firms that look high-risk to investors, those are big numbers.

Still, zombie com­panies are just one misstep away from col­lapse. So it’s best to be aware of how easily the rot can set in and not risk that at all!