Six reasons why new businesses fail
Six reasons why new businesses fail
There’s an old saying in business: “When you fail to plan, you plan to fail”. This may sound trite but it’s a good mantra to introduce into any entrepreneurial endeavour. Plan and plan again before execution and you won’t go too far wrong.
Of course, planning is required in all areas of business. Finance, growth, resource, training, and contingency are areas that need particular attention.
Lack of sufficient finance
One of the main reasons that businesses fail is that they have insufficient start-up capital. Would-be entrepreneurs frequently underestimate the cost of not only starting a business but of maintaining one.
Another problem is an unrealistic expectation of income in the early years of start-ups. Many emerging businesses won’t make any sort of noticeable profit until Year 3 and so your start-up capital will need to be enough to carry your business through this period, including rent, equipment, salaries, National Insurance, and tax.
Lack of financial expertise
Do you take an interest in your financial affairs or do you let your accountant do all the hard work? While it is tempting to pass on the management of figures to someone else, anyone in business should have a basic grasp of what the business is costing and what revenue it makes.
A failure to keep an eye on this side of the business can be disastrous. Even though you’ve employed an accountant, keeping a careful eye on finances will allow you to:
- build up a picture of what your revenues are against expenses. This will help you keep a firmer grasp on the bottom line, foresee any potential pitfalls, and predict the ups and downs of your cash flow
- respond to tax demands more confidently. As HMRC becomes more proactive in collecting business taxes, you will need to have financial data to hand to protect both your bottom line and brand reputation
- be responsive to small issues before they become major ones. Imagine hearing a worrying knocking from under your car’s bonnet but not having it looked at until the MOT or service comes around. The same applies to your company finances; having a broad view of profit and loss will give you the tools to avert catastrophe in your business
- have access to potential funding, such as bank loans or grants. In these tight economic times, nobody will lend money to a company that doesn’t have all of its financial ‘ducks in a row’.
Roy Pritchard of Pink-tiger told inspiresme.co.uk: “You’ve got to watch money. You’ve got to know what your break-even point is and keep a handle on figures. There are many businesses of whom if you asked “What’s you break-even point, they wouldn’t know what you were talking about.
Prichard continued: “You’ve got to be able to control all of it because if you don’t you’ll be in trouble and that problem will just snowball until it gets too big and you end up working for a month and getting no money for it. And that happens to people because they didn’t keep their eye on the figures properly.
Poor market knowledge
“Know your enemy”, wrote the ancient Chinese military strategist and philosopher Sun Zhu in his famed treatise, The Art of War. And being in business is a lot like being in battle – you have two ‘enemies’, your customers and your competitors, both of whom have to be vanquished on the commercial battlefield. Nobody would go to war without first ascertaining the topography of the field of combat, the size and resources of the opponent, and – most importantly – not knowing what they’re fighting for. Likewise in business, you have to have a thorough and quantifiable knowledge of your marketplace.
The most successful businesses can’t operate in a vacuum; in a world that has needs, they have to know what those needs are in order to service them. Simply having an idea isn’t good enough. Market research helps businesses better address what potential clients and customers are looking for. Being a booming business isn't just about creating a product or service. It's about using that product or service to meet a need. Market intelligence tells businesses just how to achieve that.
Don’t be afraid to stop people in the street or bang on doors – the importance of in-depth market intelligence far outweighs some slight embarrassment – and so long as you make it clear from the start that you’re not trying to sell them something, most people are happy to cooperate, especially if they’re in business themselves and you present yourself as a potential new supplier.
Your market research might also be conducted by way of email or polling buttons. Avoid cold calling on the telephone if possible – this rarely endears you to the recipients and, without the benefit of that all-important body language, you run the risk of appearing suspicious.
Lack of resource
We live in a competitive world where the best people cost the most money. And those people will have to be accommodated appropriately and equipped adequately, so starting or expanding a business doesn’t come cheap. However, scrimping on resources is a false economy for the following reasons:
- poorly experienced or under-qualified staff will not add gravitas to your business and will likely be more transitory than those who have ‘career’ focus. There is a current fashion for interns, who have been a low- or no-cost option for businesses. However, the rules surrounding internships have changed recently and are now far more stringent. Ensure that interns and those on work experience are appropriately supervised and do not assign tasks that might impact on your company’s brand reputation
- are you a service business rather than retail? Your business premises still need to be of sufficient quality to impress clients and ensure that your workforce have a comfortable workspace. Your surroundings speak volumes about the quality of your business – the UK’s numerous grubby minicab offices and garages will attest to that
- does your business rely heavily on IT? It’s best to go the extra mile when making initial purchases end to ensure that you have adequate support and back-up. If you don’t have a dedicated IT manager, ensure that one person is tasked with ensuring the integrity of your hardware and data. Compliance with such legislation as the Data Protection Act (1998) is mandatory and failure to comply can carry a hefty fine that could well cripple any small business. If you store client or supplier information, you must have a named data manager, even if it means paying someone to do it on a freelance basis.
By all means optimise resources to ensure that your investment in the business is being used to its best advantage. Bear in mind though, if an employee has to take time off on long-term sick leave through work-related stress, as the employer, you are liable. If you’re unable to afford to replace that person temporarily, the effectiveness, morale, and productivity of others within the company may be impacted.
Are you a plumber who turns up late or a gardener who kills mature plants? Perhaps a dressmaker who confuses centimetres with inches, or a business advisor who isn’t conversant with the latest legislation. If any of these apply, then it’s a fair chance that your business is going to fail spectacularly.
Make sure that, if you claim a certain set of skills, then you have one. Nothing destroys brand reputation – and therefore your business – faster than a botched job or a delayed product or service. Your employees must be similarly competent and always remember that they represent your business and so the very highest of standards must be maintained.
The UK has been notoriously bad at customer service over the years but, with globalisation, times are changing and customers and clients demand a far slicker service than they’re traditionally used to. There are numerous free customer service seminars around the UK and anyone thinking of starting a business is well advised to track one down and attend.
Reliance on small number of customers
Finally, a significant amount of businesses fail simply because they don’t have enough customers. This may sound obvious, but it’s not just about continually struggling to have enough money coming in. If your customer base is too low, even if your company is making healthy revenues, it only takes one of those customers to go under and you’ll suddenly find a large amount of income is suddenly taken away. Until that client is replaced, revenue can be hugely reduced. If you have a small amount of clients, or if a small amount comprises the bulk of your turnover, you should begin scouting for new work.