Launching a small business can be risky and success is not always guaranteed. Businesses are most vulnerable to failure during the early years of trading, with 20 per cent of new businesses folding within their first year and 50 per cent within their first three years.
These figures should not scare you off, but should prepare you for some of the challenges entrepreneurs face when starting a business. With hard work and an awareness of the issues, a new business can be a great success.
The most common mistakes new business owners make are shown below. Be aware of these before launching your business and improve the chances of your business idea succeeding.
Poor or inadequate market research
Research and planning are vital to ensure that your business idea is viable and that your pricing is both competitive in your market place and provides an adequate return. A common misconception is that entrepreneurs who have failed simply lacked sufficient funding or did not put the right team in place. However, many fail because they have not spent enough time researching their business idea and its viability in the market. If you do not complete adequate research, you are in danger of selling to the wrong people or of not understanding your marketplace.
Weak financial planning
Financial planning is extremely important. Having sufficient capital is essential for the survival and prosperity of your business. It is important to create a high-quality business plan to attract and secure the right type and amount of funding that you need to make your business successful.
Without a contingency plan you can leave yourself exposed to the unexpected. Situations beyond your control may impact on your business and cashflow and whilst your business can survive periods where there are no sales or profits, it cannot survive without cash. Building up cash reserves will ensure that you can trade effectively and develop your business.
Failing to seek professional advice will make any financial troubles worse. Few new business owners can claim expertise in all areas of their business. Using an accountant or financial adviser can help you ensure you borrow and manage money cost-effectively.
Setting sights too high
It is important to make realistic forecasts about your business potential. During the start-up phase, it can be easy to make over-optimistic forecasts, however there can be serious consequences for your business if your projections are not realistic.
Inaccurate forecasting of market size is a common mistake when starting up. Cash levels can be quickly depleted if you recruit too many people, buy unnecessary equipment or spend too much on business premises. Effective cashflow and income forecasting can help you avoid this.
A common mistake for new businesses is to focus too much on growing the sales volume or size rather than profit. There may be a temptation for you to tap into a new market or geographical area, but keeping a clear focus on your core business is crucial. Diversifying too quickly can actually increase your business risks during the vulnerable start-up stage. Writing a marketing plan will also ensure that you take into account your target customers, your marketing objectives and will help you set goals to address these.
Taking your eye off the competition
During the busy start-up phase it can be easy to forget to set aside enough time to monitor the competition. However, it's essential that you are ready to respond to competitors in your market place and to new developments. Competition is not just another business that might take money away from you. It can be another product or service that's being developed which you ought to be selling or looking to license before somebody else takes it up. Feed any useful information into your marketing plan. Your marketing plan and research will help you to set realistic targets and deadlines, and allocate appropriate resources. You can then decide to focus on building relationships with your existing clients or attract new customers. Your marketing can then be turned into sales by deciding on your sales methods.
Poor supplier and customer controls
Common mistakes for new businesses include setting up unsatisfactory credit arrangements and not taking due care when choosing suppliers. Choose carefully as your business' profitability and reputation could be at stake.
Finding a reliable and competitively priced supplier can be vital to the success of your business. Carry out a credit check to ensure that the supplier can deliver what you need and is not about to fold. Once you have identified your chosen supplier, you can then discuss terms and conditions and draw up a formal contract.
If you are dealing with a potential new customer, it can be tempting to offer credit without carrying out checks. But this can leave your business exposed to delayed or non-payment. You may find that you cannot pay your suppliers or bank on time. In turn, they may withdraw their supplies or funds, putting your business at risk.
Poor stock and asset management
Poor stock control and over-investment in fixed assets can mean your capital is tied up unnecessarily. Efficient stock control (inventory) will mean you have the right amount of stock in the right place at the right time. You need to put systems in place to keep close track of stock levels and values. Taking control will allow you to free up cash, while also having the right amount of stock on hand.
In the early years of your new business, you need to limit drawing on your cash reserves unnecessarily. Over-investment in fixed assets, such as office furniture or computer equipment, can be a problem. Acquiring fixed assets outright gives you ownership straightaway, but you have to pay for the full cost upfront, which drains cash. The alternatives include leasing assets, hire purchase or buying second hand.
Hiring the wrong people
A large part of the success of your new business will be determined by the quality of the people you recruit. Ensuring that you hire high-calibre people with the right mix of skills is not an easy process but one that will pay dividends. How you go about employing new people will depend on your business needs, eg whether the work is constant, how long it will last and the number of hours available. Explore all the options available to you: recruiting permanent staff on a full or part-time basis, fixed-term contract employee, temporary staff, freelancers, consultants or contractors.
Employing relatives and friends may appear an easy solution to staffing issues, but they may not have the right mix of skills that you need. It can also be more difficult to bring a period of employment to a close when a personal relationship exists.
Being your own boss may be a key motivator to setting up your own business. However, delegating the right task to the right person is important for both you and your business. Failing to delegate could mean you take on too much and increase your stress levels.