Why Most Start-Up Companies Fail And How To Avoid It
Starting your own business is a challenging proposition. For a variety of reasons, such as poor planning, inexperience or changing market conditions, a great number of small businesses fail. You should be aware of these common failure reasons and consider how you can avoid it happening to you.
A BBC report of October 2010 estimated that 80% of small businesses in the United Kingdom ultimately end in failure. This article looks at some of the common reasons why start-up businesses fail, and suggests ways small business owners can mitigate the risks of failure.
Failing to produce a viable business plan
A common slogan in business is ‘if you fail to plan, then plan to fail’. Starting a new business requires meticulous planning. A good business plan should contain all of the following:
An introductory summary of what your business will do
Your marketing strategy
What staff you will employ: how many and in what roles
Location of the business
What systems & controls you will have: including details of your expected business practices and your use of information technology
Detailed financial forecasts: including cash flow forecasts and profit & loss forecasts
Where your initial funds will come from: how will you keep going until orders start coming in, and until payment is received for these – remember that with some products the sales cycle can be very long
Seek advice on your business plan from your bank’s Business Manager or another professional on this. If you need to obtain a loan or apply for any other form of start-up finance, you need to present as watertight a business plan as possible.
Lack of availability of credit
Small businesses often struggle to obtain business loans from banks as they cannot provide sufficient security for the loan, giving rise to cash flow problems. The recent credit crunch has only made banks less willing to lend. Business owners seeking finance can pursue other options such as UK Government backed schemes like the Enterprise Finance Guarantee Scheme and the National Loan Guarantee Scheme, or they can examine alternatives to business loans such as asset finance and invoice finance.
Borrowing too much
Some businesses have over-ambitious growth plans, which lead them to borrow large amounts. They are then crippled by their debts and interest repayments. Always carefully consider what level of growth is realistic, and never take on credit commitments where you have doubts over your ability to meet your obligations.
Other cash flow problems
Ensure cash flow difficulties do not arise in your business by controlling costs, by ensuring customers pay promptly and by managing stock levels.
Lack of awareness of the market
Some businesses commence operations without understanding the nature of the market they operate in, the breadth and nature of the competition, or the tastes and preferences of their target customers.
Be prepared to adapt to changing circumstances and your early experiences in business. Many start-up businesses can be very different after two years to what they were at the outset, once the business owner has got to know the market better. For example, you may decide to scrap certain product offerings completely, or you may decide to concentrate on a specific niche within your chosen business sector.
If you are a new business, very few people have heard of you when you start out. Some businesses suffer through failing to devote sufficient resources to communicating who they are and what they can offer.
In times of economic hardship many businesses experience difficulties as potential customers cut their spending. Other industries contract as consumer buying practices alter, for example book and record retailers have suffered massively from the growth in online stores in recent years. If your industry contracts, consider areas you could diversify into, but any such move will require the same level of careful planning as when you started your business.
Lack of experience
When you start your own business, you must expect that you will need to carry out a number of tasks for the first time. Unless you can afford to employ others to perform these tasks, you will be responsible for: financial management, marketing, recruitment, human resources matters, ensuring compliance with applicable legislation and regulations, purchasing, inventory management, logistics and more. Your bank may run business skills seminars, alternatively there is a great deal of guidance available on the internet on these topics, and a great many companies who offer consultancy services in these areas.
For some, the first instinct on starting a business is to look like a company, perhaps with a staffed office, business stationery and a website. Think carefully before doing any of these – will any of them actually benefit you? Might you not be better off working alone from home, at least initially? As regards a website, many small business owners have one of these, but how often does the site generate significant amounts of revenue?
Small business owners who employ staff may lack experience of human resource management, and employee dissatisfaction could follow as a result. In addition, you may lack the necessary experience of recruiting in order to know the right people to hire. It is important to understand appropriate levels of remuneration, how to motivate employees and how to select the right people.
What may be a sound business proposition at the start may fall on hard times at a later stage should you fail to embrace new technologies or react to industry developments. Keep up to date with advances in your industry and don’t let your competitors gain an advantage.
Giving up too easily
Remember that gaining a foothold in your chosen marketplace will be difficult. If you are selling a product, you may need to market it extensively before sales start coming in. If you offer a consultancy service, the more work you get, the easier it will be to get further jobs. Rejection is part of life for a new small business, so unless financial reasons make it impossible to carry on, keep going!
Author Bio: Keith Tully has been in corporate insolvency since 1992 and in that time has worked for one the big 4 accountancy firms PWC, managed his own corporate insolvency firm and recently is now been integrated as a Partner at UK business rescue experts Real Business Rescue where he supports the network of 35 offices in providing solutions to company directors facing company distress.