How to Run a Small Business that Runs Itself

Victoria Morrison

May 1, 2019

Running a small business isn't easy, but if you're reading this, you probably already know that! It's tough, but it doesn't have to be painful. In fact, following some basic steps and best practices might help get your small business run more efficiently. It's no secret that some small businesses don't make it. The survival rate is roughly 50 percent after 5 years, and 20 percent of new businesses fail during the first year, according to government statistics. Only 30 percent of small businesses make it past the 10-year mark. It seems logical that business owners should strive to build a business that can function when they're absent - if it makes sense for their business. But considering how many small business owners and entrepreneurs work day and night, are there truly businesses that run themselves?

Is passive income the ultimate "set it and forget it" strategy for a small business?

It's an old saying, but a fundamental concept. An employee only gets paid hours worked. But businesses, on the other hand, and their staff, handle repeat business even if the owner isn't doing the work, which makes owning a business worth the risk. A business that generates passive income is another thing altogether. An example might be someone whose business is owning rental property. Real estate and other investments that generate passive income fall into this category. They generate income (such as rent from tenants) all year, with minimal involvement. So, is passive income the ideal strategy for a small business? Not necessarily:

If your pre-tax gross personal income target is $60K/year, your rental income, after deductible business expenses, would need to be at least $5,000 per month.
With a monthly mortgage of $7,000 and other costs at $1,000 per month, you would need to collect $13,000 in rent monthly to reach your income goal.
To charge those rents in a city like Toronto, you would need a large multi-unit property in a nice neighbourhood. Today, a property with those features would cost over $2 million.
If you qualified for the mortgage and made a big down payment, you might have a mortgage of $1.5 - 1.75 million, and a monthly mortgage payment over $7K per month.

Given real estate prices in Toronto, a lot of capital is needed up front. And if any of your properties weren't rented, expect a significant reduction in your income. Starting a passive real estate business with the income you need would require a lot of capital and several rental properties. Acquiring properties one by one over time wouldn't get you to your income goal for many years, or even decades.

Portrait of mature businessman playing office games in loft

Are there online businesses that run themselves?

Some types of online businesses require less hands-on involvement than others. For example, small businesses that sell products via their website can have their suppliers ship products directly (drop ship) to customers. Amazon's platform for external sellers works in a similar way. If successful, an online drop shipping business may only need automated strategies to drive traffic to its site, and source products to sell from distributors. Just about everything else is handled by suppliers or subcontractors, or even platforms like Amazon. This new type of semi-automated business could theoretically generate income for its owners with minimal involvement, and a single person could manage the business using a smartphone. Whether this type of business is sustainable and scalable, depends on your goals as a business owner. To learn more about drop shipping, check out Oberlo's guide to drop shipping using Amazon or Canadian e-commerce software giant Shopify's ultimate guide to drop shipping.

What does it take to run a small business?

How about energy, grit, sheer determination, confidence, time, money, optimism and learning from failures? Owning a small business can be rewarding, but it's rarely a get rich quick scheme. It can take years before you make a profit, and even then, you might not be paying yourself what you expected. To understand what it takes to run a small business, let's first look at why businesses fail. Here are some of the main causes:

The business runs out of cash before it has enough sales to sustain itself, or costs are too high and revenues are too low
Lack of startup and working capital, heavy reliance on loans
No business plan or the business plan wasn't reviewed by a mentor or successful business owner
Risks were misunderstood, or the potential of the business overestimated
Lack of knowledge or lack of skills, such as marketing, inventory management, sales
The business' products, services or location doesn't meet customer needs
Pricing and competitiveness aren't attractive to customers
Inadequate service, poor processes, quality issues or errors pushed customers and lead to negative reviews
The business owner didn't do enough research about the market, the location, or demand for the product or service

To overcome these and other challenges, business owners need to properly plan and prepare. They can follow tips and best practices on what's needed to run a business. As a small business owner, your mission statement and business plan should state exactly what you want to achieve. It should also cover your competitive advantages, your business model and intentions of meeting targets and attracting initial customers. For help with your business plan, you can download a detailed business plan template from smallbusiness.ca.

How to run a small business that runs itself

Businesses that literally run themselves are a rarity. As mentioned above, some online and investment businesses that generate passive income may come close to running themselves. Most of us think of a business that "runs itself" as one that's well organized, efficient, and run by a business owner who's maximized her business's potential by following best practices. Entrepreneur Richard Fertig writes in his blog on Forbes that business owners should be able to answer a key question: "Do you work for your business, or does your business work for you?" Fertig suggests that if the reward for building a successful business is freedom (to travel, to spend time away from your business doing other things), then your goal should be to build the business so it can function well without you.

Smiling mature man using digital tablet in loft office

What can small businesses do to run like a well-oiled machine?

Even if taking time off from your business isn't your primary goal, you can still take steps to make your business run smoother. Here are some of the things you can do:

Make sure customer satisfaction and retention are a top priority.
Do in-depth research to make sure products and services provide value or something unique that competitors don't.
Make sure you know your numbers. If math isn't your strength, discuss your business plans with an accountant and ask for advice on taxes and financial strategies to reduce costs and waste.
Manage risks properly and protect yourself Get the right insurance coverage for your family and your business.
If you run your business out of your home, be effective and efficient by following simple tips on how to work from home.
Focus on improvements and innovations to keep customers happy and to justify charging more for products and services with added value.
Partner with customers. Customers are loyal to businesses who help them solve their own challenges and provide genuinely useful advice.
Make sure your business's values are reflected both internally and by staff when they're facing customers and suppliers.
If you sell products or services, think about what goes into a great customer loyalty program, and design one that works for your business.
The Profit, CNBC's hit business reality TV show, helps small businesses overcome serious challenges by focusing on the 3 Ps: people, process and product. Their stories are excellent examples that help small business owners diagnose problems to make their businesses run smoothly and profitably.

Running a small business checklist

If you're just starting out on the small business journey, check out tips from Innovation, Science and Economic Development Canada. Also, check out thebalancesmb's overview of the different areas to think about as your business concept takes shape. Here's a simple checklist for some of the decisions you'll need to make:

Flesh out your great business idea and get feedback from people you trust.
Get your business plan done. It can be basic, but you'll need one to borrow money from a bank or an investor. Your BP is also a clear reminder of your business's roadmap. Have it reviewed by mentors or other business owners you revere.
Choose a business name and decide what type of business you want to operate (such as sole proprietorship, partnership or corporation).
Register for GST and provincial tax numbers, and a business licence if needed.
Hire the right people. Find good employees through networks and contacts. Be prepared to handle payroll before you hire.
Consider consulting with an accountant and a lawyer about taxes, payroll and business types and registration.
Protect yourself and your business with the right insurance coverage.
Get your website, your marketing and your branding ready to go.

Check out the federal government's Business services and Information portal and Innovation Canada's business help app for more information on many aspects of starting, running and growing a business, including grants and investment.