London Small Business

Why Do Small Businesses Fail ?

Avoid These Pitfalls For Startup Success

Over 20% of Businesses fail in the first 12 months as around 70% Fail by year 5.So why do they fail and what are – find the pitfalls -so you can avoid.

20% of businesses fail in the first 12 months.

Reasons For Failure

  • Poor or Lack of Planning
  • Business Model is Flawed
  • Poor Cash Flow or Lack of Working Capital
  • Inexperienced Management Team
  • Ineffective Marketing

Often it will not be just one, but multiple of the above that combine to cause the failure, for example:
lack of planning resulting in poor cash flow,
ineffective marketing due to inexperienced management team and poor or no marketing plan.

Let’s take each subject one at a time to understand in greater detail.

The Business Model is Flawed

If the basic business model is flawed, no matter how great the plan, how great the management, unless you have a bottomless pot of money, it’s going to be a struggle just to survive.

Is there a market for what you are looking to do? How big is that market and how crowded? Are there companies that dominate the market and how would you be able take a share of that market?

What can you offer the consumer that the other companies in the segment cannot or do not offer. How will differentiate your offer to gain share ?

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Example:

New start Print on Demand company has some designs and launched a print or demand / drop-shipping business online with a great website and cool name.
Priced at £12.99 with a gross profit of 30%.

The business is unable to sell a sensible volume on the chosen platform at this price point as the market is crowded, there are competitors with similar T shirts offered at £9.99 on the same platform.

In a bid to increase volume, the business owner decided to reduce the price to £10.99 leaving an insufficient margin to cover the costs involved in selling on the platform, without the accounting for generating a profit.

A more experienced management team would have reasonably been expected to research the market and find an alternative business model.

Cash flow

Planning Cash Flow

A startup can easily run out of money for two main reasons-
1. It doesn’t sell enough units at enough profit.
2. It sells a greater volume but overtrades and does not have the capital to cover that trading level.

It is important for startups to have a sensible business plan that is based on sound logic and reasonable assumptions.

This must include how many items / services you aim to sell, and exactly what you will do to make the sales happen.

In other words, a sales projection for the first year, detailing units sold (hours sold if a service business) and the income that will generate. A good marketing plan will also detail the cost to required to achieve that objective.

Once you have the Sales Forecast and the Marketing Costs, produce a Cash Flow Forecast to ensure that you have enough cash in the bank to cover the expenses at any time.

I usually do the same exercise with a volume of units at both 20% under forecast and 20% over forecast. This will ensure that if the business comes in under budget it will have generated enough profit to cover the expenses. Also, if the business over trades it has the cash to cover the orders.

Insufficient Planning For Success

Planning for success

This really should be the number one on the list, as many businesses that fail due to lack of cash flow. Many may have survived with better utilisation of the cash they have.

Likewise, many businesses that fail due to
A flawed business model would have never started or started with different model if the had done the research and planned properly.

Inexperienced Management Team

An experienced business manager or entrepreneur will often start with a business that they have personal knowledge of.

Failing this the experienced and successful businessman/ woman, will ensure a team is in place who have the relevant experience.

To have an idea is one thing, but to make it your business, without the relevant knowledge of the market and management experience is another.

what areas you have you a good knowledge of, either professionally or as a hobby. Your chances of success will be far greater When you understand in detail the market.

Ineffective Marketing

It would be impossible to describe here exactly what good marketing looks like here. Every business, online, bricks and mortar, local regional and national businesses, because require different approaches.

An essential for any business should be a website (see our useful post here ) depending on your business maybe an e-commerce site.

The one common thing in any of the above, clearly identify your customers, know exactly who your customers are.

Find out as much as you can about their pain points and what exactly how you can help reduce these.

Have a plan and review your planned conversion rate vs actual conversion rate. Take the appropriate action if you fail to meet the objectives / targets set.

I hope this helps and gives you some thoughts about avoiding the common pitfalls.

Finally, I wish you well in your new business, I hope this article gives you an insight into why small businesses fail and helps you avoid some of the pitfalls.

Philip

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