I could equally have entitled this piece, ‘101 Reasons Why Business Startups Fail’ – but after the first ten reasons most readers will have switched off and told themselves it couldn’t happen to them. I will therefore limit my reasons to ten in the hope that you budding entrepreneurs will take note of these primary reasons for failure and hopefully avoid them:
- Failure to write a Business Plan
- Insufficient working capital
- Insufficient capital investment
- Over optimistic sales forecasts
- Pricing miscalculations
- No account taken of competitor response
- Failure to control cash flow
- Not enough market research undertaken
- No marketing and advertising strategy
- Hiring the wrong people
It doesn’t matter whether you are manufacturing widgets or providing an interior design service, all of the above can apply in equal measure as contributory factors in your business failing.
According to figures released by the Office for National Statistics in March 2020, around 80% of UK companies failed within their first year and only 42.4% of businesses started in 2013 were still trading five years later. Why is the failure rate so high? Quite simply the main reason is the failure to plan your business properly. Remember the old adage – if you fail to plan then you plan to fail!
Writing Your Business Plan
The most important document for any business is the Business Plan. If yours is a totally new venture it is absolutely imperative that you have a detailed Business Plan and financial forecasts in place to cover the first year of trading and an outline as to the direction the business should take and the funding required for years two and three. A detailed, well written and well researched Business Plan will greatly increase your chances of success- providing you stick to the road map you have created and work within the financial guidelines you have set out.
I prefer to use a free form Business Plan that I then tailor to the individual business. However, there are many different Business Plan Templates available free of charge on the internet that will help you to make a start with your planning.
As a general rule the plan should start with an Executive Summary. The Executive Summary should summarise concisely the main points of your business plan and charm the reader into reading the rest of your plan. However, you should ideally complete all other sections of the business plan before you write the Executive Summary!
Your Business Plan should include the following points:
- State very simply and clearly your business proposition i.e. how your business satisfies your customers’ needs
- Explain how you are going to generate an income and make a profit
- List the specific competitive advantages of your products and services in relation to other alternatives in the market
- Outline the main characteristics of your market, including size and growth, as well as specific details about your main groups of target customers
- Identify which marketing channels you will use in order to reach those target customers
- Highlight your financial projections with evidence to justify your assumptions
- Clarify your financial requirements (funding required and why it’s needed plus source of funds information)
- Identify the key people involved in your business, emphasising their strengths
- Highlight your progress made to date, and your next key business aims
- Show how your business can adapt to change and unforeseen challenges
- Include a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) for your proposition
- Include CVs for each director/partner/owner/key employee as Appendices
- Include Cash flow and accounts forecasts for the next three years as Appendices
This is not an exhaustive list. Every business is different and if the main purpose of your plan is to secure investment or a loan then there will need to be greater emphasis on the financial elements, justifications and assumptions. However, all businesses need a Business Plan. It should be the blueprint for your business activity for the next three years and should be capable of being updated, adapted and tweaked as required to enable you to stay ahead of the competition and be profitable and successful when your competitors start to struggle. When approaching this, look on it as a tool that will help you to succeed rather than a chore that has to be completed because you’ve been told you have to do it.
Getting The Funding Right
Capital investment and working capital are often misconstrued as being the same thing – they are most definitely not. Your capital investment is funding used to invest in business assets – items such as tools and machinery or computer equipment. Working capital is additional funds that will be required in the day to day running of the business to pay wages, suppliers, rent, rates and other running costs.
Put simply: Working Capital = Current Assets – Current Liabilities.
If your business has insufficient initial funding then it is only a matter of time before your business fails. This can have serious implications for you as the business owner as you may become personally liable for the business debts (see previous blogs for further information on this subject).
Work closely with your Business Consultant and Accountant to make sure your financial forecasts are as accurate as possible and be sure to allow a contingency of at least 10% for your initial working capital requirements. In addition, remember that as a general rule you should always keep three months running costs available as additional liquidity to cover for the unexpected.
Be Realistic – Not Optimistic
It’s all very well saying, ‘I’m a great salesman, I’ve got a great product, so therefore I’m going to close 5 deals a day at £x per deal, work seven days a week and therefore bring in £y revenue each month’. You won’t! No matter how good you think you are as a sales person, no matter how much you believe in your product and no matter how good your product may be; there are always reasons why potential buyers won’t buy. You may have priced your product too high in the eyes of some potential purchasers, you may have over estimated the likely demand for the product, you may not have researched the lifespan of the competitor product you are trying to replace, or you may just have caught the buyer on a bad day. Even worse, your product may not be as good as you think it is and a competitor is offering a cheaper version.
Getting the pricing right for your product or service is the key to maximising your gross profit. Make sure you spend enough time researching the market to see what your competitors are charging. It is not always necessary to try to undercut a competitor, you can even charge more for a similar product or service if you have a worthwhile USP (Unique Selling Point) that makes it worthwhile for consumers to pay that little bit extra. Indeed, when operating at the top end of a market you could lose out if your product or service is deemed to be too cheap to warrant the exclusivity it aspires to!
Even if you are adamant that you have nailed the pricing, and know your market and your competitors, it is foolhardy to then forecast high sales volumes without having substantial narrative available in your Business Plan to explain why these forecasts are realistic. Optimism is all very well and indeed, is to be applauded in certain situations, but realism is far better when it comes to sales and financial forecasts in business! Believe in your abilities by all means – but be aware that external forces can change your market without warning. For example, in 2007 mortgage brokers were left with virtually no products to sell as a result of a meltdown in financial markets.
Cash Is King!
It is an old cliché in business, but it is a fact that if a business does not manage its cash successfully it will fail. Every business should aim to generate enough cash to meet its everyday business needs. If it fails to do so it will have to take on debts such as a loan or overdraft. These debts will then also need to be serviced from the cash the business is generating.
If a business is not generating adequate cash to meet its needs it will struggle to pay its suppliers and meet the wage bill. Without remedial action the business will ultimately become insolvent and fail. Perhaps it would be better to say, ‘Positive Cash Flow is King’; because ultimately this is how a business can be judged.
A set of accounts can be manipulated to show that a business is trading profitably, but the cash flow of a business cannot be manipulated in any way. It can – and should be – managed for the benefit of the business, whereby accounts receivable are paid well within the agreed time frames but accounts payable are stretched to the limit of the agreed terms.
A disciplined approach to account and cash flow management is needed from day one. Positive cash flow reduces stress for business owners and allows them to concentrate on growing the business. Too many small business owners spend too much time ‘firefighting’, trying to keep suppliers happy and not enough time on actually generating the cash required to pay them. The ultimate result of this is insolvency and business failure.
If your business is struggling with cash flow problems please ask for help. If you get help soon enough there is more likely to be a solution to the problem.
Research, Marketing & Advertising
It is no good having an excellent product or service if you don’t tell anybody about it! As a start up, your business has to build a brand from scratch. You can only do this by putting a lot of thought into how you want your product or service to be perceived. You need to decide on your target market and how best to get your message across to that market so that as many as possible become customers.
If you are fortunate enough to have a bottomless pit of money then you can hire an advertising agency and a marketing strategist to do all of the work for you. Regrettably, most start ups don’t have that luxury. It is therefore down to the business owner to do the initial market research and conduct focus groups. The business owner then needs to consider a combination of social media, web sites (including search engine optimisation) and more traditional means such as leafleting, local newspaper advertising, magazine features, radio and/or TV advertising etc, and run a sales and marketing campaign that will bring the new product or service to the attention of the target market.
In practice, it is advisable to employ the services of an experienced web designer/IT consultant to help you with your digital marketing platforms; making sure that you build the cost of these services into your Business Plan and financial forecasts. If you have a substantial advertising budget then a local agency will help you to spend it as efficiently as possible. Always try to make sure you can quantify your advertising response by using tools such as dedicated phone numbers, coupons, promotional codes. In this way you can concentrate your spending on the advertising that shows the best return on your investment.
If you don’t have a marketing and advertising strategy you are not likely to succeed in business.
Hiring The Right People On The Right Package
Have you ever wondered why most big businesses have a big Human Resources (HR) department? They have recognised that one of the key drivers in making their businesses successful is employing the right staff for the right job at competitive remuneration . However, I am not for a moment suggesting that you should hire an HR specialist! I am merely trying to emphasis that having the right people in the right position within your organization from day one will help you to become successful.
For example, if you are a new double glazing and insulation company selling to the general public you need to be hiring an experienced business to consumer sales person on either a self-employed commission only basis or perhaps a relatively low basic and generous commission. You need this person to be ‘hungry’ for success; a suitable profile might be ‘married with children and a mortgage’, and therefore needing to earn at least the advertised ‘on target earnings’ figure to achieve their lifestyle aspirations.
On the other hand, if you are looking for production operatives on a small initial line, you may want to consider a minimum wage hourly rate with piece work rates on top for each satisfactory quality checked item produced.
Whatever the vacancy, make sure that you take time to consider the profile of the person you want to hire, always being aware of the employment laws on recruitment. Consider speaking with your local Chamber of Commerce about any help they can provide with candidate selection and recruitment. Look for recruitment agencies that specialise in the types of vacancy you need to fill. Don’t be afraid to negotiate with them on their published fee scale either!
The right people can greatly enhance your chances of success, but the wrong people can drag your business down and be costly to remove.
The Rewards Of Getting It Right
If you can avoid these ten common pitfalls you have an excellent chance of being one of the 20% of businesses that make it through the first year. Of course, if you hire the services of a reputable Business Consultant to help you, that will further enhance your chances of success!
Think of why you decided to start your own business in the first place. I am fairly sure that one reason was ‘to take back control of your life’. Another may have been to ‘improve your work-life balance’. You might even have thought, ‘I want to make money for myself, not for somebody else’.
If you still feel the same then take a raincheck on the above list – you won’t regret it! And don’t forget, if you need help please ask for it.