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Why Most Small Businesses End Up Failing (And What You Can Do)

Posted 1 months ago

Why Most Small Businesses End Up Failing (And What You Can Do)
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There are a number of reasons why a business might fail - every situation is unique. But with 20% of businesses not making it past their first year, and 60% going bust within the first three years according to research published in the Telegraph, there are a number of factors that can be applied to the failure of pretty much any business. 

In this guide, we build upon our already expansive support for entrepreneurs to highlight the main reasons why most startups fail, and what you can do to keep your business on track. 

Lack of a business plan

It is all well and good coming up with a great idea. But the idea alone won’t result in a successful business. Part of taking that idea to market is producing a comprehensive business plan that outlines your businesses’ goal, objectives, and how you plan to achieve them. 

Think of a business plan as a map that pinpoints your starting location and eventual destination. What will enable you to reach your destination? You should look to include vital details such as goals, sales and other financials; how you intend to market and others. 

Your plan should also include where your business will be in the next few months to the next few years. Include measurable goals and results. The right plan will include specific to-do lists with dates and deadlines. 

Without a clear and thorough plan, most businesses will fail. Ensure, as an entrepreneur that before you start your business, you have a rock-solid understanding of your industry and the competition you face. This will certainly help in running a company for the long term. 

Another important component of the business plan is market research. How large is your market sector? Can you infiltrate it? Even business giants such as Tesco, JD Wetherspoons, or JD Sports will carry out thorough market research whenever opening a new store and will take into consideration the competition, how many potential clients live in the area and whether or not there is enough potential business to support a new store opening. 

The same applies if you’re building an online business or inventing a product. If you have no customers, you have no business. 

Poor Cash flow 

While a lack of business planning is a major pitfall for businesses that are just starting out, poor cash flow is a major contributing factor to failure. A recent study by US Bank found that 82% of the time, poor cash flow management contributes to the failure of a small business. 

Part of running a business involves setup costs, and cash flow - the speed that money is coming versus how quickly it is going out. Starting out, it's incredibly difficult to get this right. Your expenses, especially during the early stages of growth, are most likely to be greater than your revenue—you’re still trying to develop your product, go to market, figure out sales and marketing, admin costs, and contractor relationships. 

This is why cash flow forecasting is so important. Part of a business’s goal is to grow, and a detailed forecast can help to make sure that it achieves that growth in an efficient way. 

Failing to understand the market, and your audience

While a detailed business plan should avert this risk, many businesses simply do not understand the market they are trying to fit into. This is why marketing is so important. While entrepreneurs should have a grasp of their own unique selling points (USPs), they should also be able to match and even surpass their competitors

Similarly, an inability to connect with your target demographic means that not only are you unaware of your prospective customer’s wants, but you are unable to help them. If you do not understand your consumer, you are realistically not going to be able to effectively sell your product. For example, you wouldn’t open up a sailing shop in the middle of a desert!

To ensure you don’t fall foul, make sure you do your research. Use market surveys, focus groups or surveys so you can connect with your audience and get to know them. 

Unable to access adequate funding

If you find yourself in a position where you have little cash left and your business is floundering, the chances of accessing another loan are small. Banks are tending to lend less and less to businesses and as a consequence is no longer the primary route of finance for start-ups. If you struggle with bad credit, have no security, or haven’t been in business long enough to provide an adequate financial history for your firm, then you will struggle to gain access to a bank loan

To ensure you can gain funding, why not try methods of alternative finance? As we have discussed in previous guides, new innovative sources of raising capital are becoming increasingly popular. Equity crowdfunding is much more suited to start-ups who have no security, no proof of affordability or credit to underwrite a loan application which makes them more eligible for an equity investment.

Production 

The quality of your product and service is essential for returning customers and loyalty. Businesses that fail often build products based on assumptions. It’s key to have a clear definition of the services you offer. Without a clear definition, you will be unable to effectively develop, market, and sell your services. 

If you are serious about success, you will build your products with your customers. Businesses that fail build products based on assumptions.

Sales

Identifying a marketplace is just part of the planning required in your business. Selling your product or service is perhaps the most important part of your operation. A route to market is essential to your future success. 

When it comes to sales, look at supply chains, or online marketplaces such as Amazon and EBay. Make allowances in your pricing for the sales and marketing of your product. An example of this is perfume and washing powder. The product themselves cost very little to manufacture, and as such the gross mark-up is huge. The remaining costs are spent on marketing, enabling a business to sell the product. 

According to CEO of Nextfin, Sacha Bright: “A business usually fails because it is weak in one or two of three basic principles of business: 

  1. Sales & marketing;
  2. Admin & cash flow management;
  3. Production & operations;

“An entrepreneur is usually strong in one or two of these areas. It's very rare for them to be fully capable of satisfying all three. 

“Understanding these weaknesses and plugging the holes with either professional help or in-house personnel is the secret to success.”



Authors: Oliver Murphy & Sacha Bright

Disclaimer

To the best of our knowledge, the information we have provided is correct at the time of publishing. Sacha Bright is not a solicitor or accountant and we recommend that you seek professional advice on any topic discussed.

Tagged: entrepreneur business sme alternative finance equity crowdfunding



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