There are some very obvious reasons why a business will fail but those mistakes keep being made and businesses keep going under.
It is interesting to note that opinions will differ as to the reasons why a business will fail depending on the longevity of the business. Start-ups and new small businesses are particularly vulnerable.
Homework is essential for the new, small business and that homework involves knowing which marketplace is the best one for you, knowing that marketplace thoroughly which includes understanding the competition and more importantly what your point of difference is and as many gurus tell us today, know what your “unique selling proposition” is.
You should also have a very good idea of who your ideal customer is and it shouldn’t be every man, woman and dog. It is very difficult to be everything to everyone, even Coca-Cola pitch to a type and demographic and that hasn’t changed in years.
A critical homework task is a business plan, without it, you will be at sea without a rudder. A business plan will ensure you focus on strengths, weaknesses, opportunities and threats – yes the good old SWOT analysis. Financial analysis, goals and your vision also form your business plan. Remember to do a regular review, your plan should not be cast in stone but be fluid.
So not doing the required homework is one big reason, new business and/or entrepreneurs will fail and according to Bloomberg in 2013, that is why 80% went out of business within 18 months.
Overspending is one reason which will affect a business large or small, old and new. Do this on a continual basis and there can only be one outcome and it isn’t a good one. It is essential to keep track of expenditure in relation to income, even if it is on a spreadsheet. Getting an accountant and having regular contact, not just tax time, is ideal.
Profit margins need to be realistic. If everything you sell is at “break even” it will be like marking time on the spot, you won’t ever get ahead. The cost of production, whether it is a tangible product or a service, should provide a reasonable profit. Keep the cost of production down and also ensure the sale price is realistic, don’t fall into the discount trap or think you won’t make sales because the price is too high. Check out the competition. Get independent advice to assess your financials.
Don’t neglect your invoicing. That may sound daft but getting carried away with sales you could be slow to invoice, don’t follow up on late payments and don’t do anything about debt recovery. Making those calls to follow up on non-payment is not easy and for a small business, it could take someone away from their usual task. Having good systems in place with regular reporting will streamline the process. Consider outsourcing this part of your business to a Factor. Looking after your accounts receivable is their specialty and it will ensure consistent cash flow which is an important aspect to keep your business ticking over and viable.
Regular reviews of your product and services to ensure they are relevant. Not keeping up with changes in the marketplace can have a significant effect on your profitability. Large corporations have disappeared because they did not change as their market changed, remember Kodak, Pan Am and Compaq.
Another aspect of keeping up with the market revolves around technology and digitalisation or becoming a digital company, having an online presence, adopting eCommerce and embracing digital marketing. A large percentage of customers expect to at least find you online and may even think it odd if you don’t have a website.
Finally, management can be a deal breaker, you may own the business but are you the best manager for your business. Be honest, be humble and realise your true strengths, it could make the difference between failure and success.