Starting a business is a high risk venture. Depending on the country, the analyst and the business sector, estimates for the number of small businesses failing within their first year range from around 30% to around 65%.
The three main causes of business startup failures are:
- The experience and personal qualities of the manager.
- A flawed business model.
- Inadequate finance.
Coolly assessing yourself and your business in light of these three factors will help you to avoid the pitfalls. But don’t let your enthusiasm rule. Over optimism is the overarching cause of failure.
Personal Qualities for Business Success
Large businesses employ a host of managers with different skills; a small business manager must cover the whole field. To do so he or she must have:
- A Strong Work Ethic. Either you have it or you haven’t. But if you’re not prepared to work very hard for very long hours, probably forsaking holidays, days off and "quality time" for long periods, don’t start a small business.
- Training and Skills. You’ll need knowledge and skills covering: Organisation and Management, Finance and Accounting, Employment, Health and Safety and Tax legislation, and specialist skills in your chosen business sector. Be prepared to attend training courses,before you start, to fill any gaps.
- Social skills. Can you lead and motivate your employees? Even if you don’t plan to have any, can you successfully interact with customers, suppliers, bank managers, local government officials, etc? You’re probably the worst judge of this. Try asking a candid friend -- and brace yourself for what could be an uncomfortable reply.
A Successful Business Model
It’s easy to get carried away with enthusiasm for your business idea, but a successful business plan must include an unemotional assessment of:
- Your Product or Service. Will it work? Is it robust? A product which breaks or a service which lets the customer down spells doom. Test it in action -- and test it again.
- Demand. How many people want what you have to offer? Who are they? Where are they? Can you make it more appealing? Don’t just guess -- do some market research.
- Marketing and Advertising. How are you going to attract your target customer?
- Competition. Is anyone else offering it? Where are they? Can you match the competition’s resources?
- Location. If your business depends on customers coming to you, this is vital. Again proper market research is a must.
To give your business the best possible chance of success you must have reliable answers to all these questions, and be prepared to modify your Business Plan in the light of the answers.
Financial Causes of Business Failure
Naturally enough, the ultimate cause of most business failures is simply running out of money. This may result from inefficient management or a poor business model, but it may equally be for purely financial reasons including:
- Under Capitalisation. Do you have enough money to cover all your costs until you start making a profit? And some more in reserve?
- Insufficient Margins. Any business needs to be price-competitive, but that doesn’t necessarily mean the cheapest. Customers looking for this will immediately desert you for anyone who undercuts you. Cutting margins, and hence profitability, to increase turnover is fatal. If you keep your costs to a minimum, but still can’t set a price that will bring a healthy profit, then your business model isn’t viable.
- Cash Flow. Inadequate cash flow is a frequent cause of failure even in a fundamentally profitable business. Take precautions against seasonal fluctuations, bad debts and slow payment of invoices.
Above all, in your financial planning, always allow for -- and expect -- the worst case. The best business ally you can have is a sceptical accountant or bank manager.
Tony Allen - In 2004 I began my "fourth career" as a freelance writer. In my first career, after training at the Royal Military Academy Sandhurst, I ...
