As an insolvency practitioner, I have met met hundreds of new business owners…wouldn’t it be great if you could learn what I’ve learnt from all those meetings?
Well you can! Here’s an article just for you…
So you want to set up in business, do you?
Or you’ve recently started trading but not doing as well as you hoped?
Would you like to know how to avoid going under? How to give it the best chance of being a success?
You see, there’s a big problem with small businesses. And that is when most people go into business, they only look at the positives such as what they’ll do when things really take off. Things like what new car they’ll buy, how they’ll spend their increased free time, how they’ll manage all that profitable work? ….
… They build the business on two things:
(i) what they think they know; and
(ii) what they hope.
They don’t go out of their way to find out what they don’t know or to plan for things not going quite to plan.
Yet it’s often what they don’t know or haven’t thought about that will eventually kill the business. And with it, destroy their hopes and dreams, and often their own and their family’s finances.
The bad news is that’s how it turns out for the 4 out of 10 new start-ups – yes, 40% of new businesses fail within the first 2 years!
That’s almost as many businesses fail as are still alive within just 2 years. But it doesn’t end there – of the survivors, most then go on to fail within the next 3 years. Only one in ten are still around by year 5.
The point is you will fail if you follow the course most new business owners do. Yet with so many not making it, there’s an abundance of experiences out there that you can learn from. And it’s free to do so! Here they are…
The business was started for the wrong reason
Some businesses are set up and then run more like a hobby than a business. I call these ‘lifestyle businesses’ – they tend to merely exist, either doing poorly or at least not doing spectacularly, until something happens later to cause the wheels to come off…
It scares me that right now many small businesses being set up out of necessity – because there are no jobs around – rather than by someone who has identified a profitable opportunity.
Why have you set up?
I can do it all myself!
In his book, the E-myth, Michael Gerber spoke of the 3 skill-sets needed by business owners today – entrepreneurial, managerial and technical. No one I know has all three, in the right degrees. Businesses that don’t have and won’t buy in all three skill-sets lack the cutting edge to succeed in today’s harsh business environment. Seeking help from outside the business to plug skills gaps is a show of real strength, not of weakness…
Read the book, plug the gaps!
Not enough money
It always costs more to set up a business than you expected and then survive the inevitable troughs later on. At this time when the banks are selective as to whom they lend to and seem to fail to support customers when they most need them, it’s not a good idea to rely on credit lines over which you don’t have full control.
Have you taken a good amount of time to assess how much money you will need, where you can get it from and how you’d cope with what might happen when business dips?
Poor financial skills
It is vital that you understand how the business works financially. If you don’t, it won’t be long before you won’t have a business because you don’t properly understand the machine that brings in the cash it needs works. Also, if you’ve got weak financial skills, you probably don’t have a strong profit motive. Sure, you love what you do, but you’ll return to stereotype ‘manager’ or technician’ – see above – roles when things get tough, and when you do, you’ll dig the business into an even bigger hole rather than solve its problems.
Do you understand exactly how how the business ticks financially? Do you understand the figures? Think about going to college to learn management and accounting if you don’t. Don’t try to abdicate responsibility for your business’s finances to an accountant – sure it’s ok to hand the processing to him, but not responsibility.
The location, the product or service is all wrong
Quite simply, the business opportunity was not fully explored, optimism blinded reality… there are many businesses in our High Streets which have got the location, product or service wrong. I stand there and think ‘just what is the owner thinking? It just doesn’t stand a chance!’
Have you allowed your heart to overrule your head?
Have you heard the saying ‘to fail to plan is to plan to fail’. Have you planned for what is going to happen? And what might happen? – you see the unexpected does happen, increasingly so today!
A lot of the things that cause businesses to fail can be anticipated, plans can be formulated to avoid failure.
Have you spent enough time thinking about what is going to happen and how you’d deal with what might happen?
Poor trading levels
Where a business suffers poor trading levels, often their owners cut costs to manage their cash flows – they do this because it’s often the easiest decision and produces short term cash benefits. However, if this is all you do, you’re merely storing up much more serious problems into the medium term. It’s simply not possible to cut yourself to greatness!…
If things don’t work out in terms of sales levels, what’s your plan? How certain are your planned sales figures?
Many businesses wait for sales to find them, because ‘that’s what you’ve always done’. If you have worked for someone and have now gone to work for yourself, this could be a big problem for you. I often can’t ‘find’ any presence anywhere of such businesses – there is no website, no sales force – and if I can’t find you, how can you expect would-be customers to find you?
What’s your marketing plan? Have you written it down? Do you follow it up?
Failing to set and follow a clear strategy for success
Without a formal plan, businesses develop haphazardly. And one day you’ll scratch your head and wonder just how the business got to where it is now – it will then be slowly strangled, by ‘unfair’ relationships with a major customer, by your banking constraints, or something other you could have anticipated, …
What’s your strategy? have you written it down? Do you act on it?
Business model with high fixed costs
An inflexible business model with high fixed costs may work in boom times, but it will cause significant problems in the inevitable times of bust.
Tell me all about your fixed costs…
Finally, knowledge without action is pointless, it won’t change the outcome, so now go and do something about it!
Paul Brindley FCA, Licensed insolvency practitioner
Midlands Business Recovery