Why Do New Businesses Fail?
The COVID-19 pandemic has impacted the way we live, work and play. For many, working from home and hosting virtual meetings with no commute is the new norm. It’s almost like a decade of change has been compressed into just 18 months.
The snap lockdowns produced a whirlwind of change with curfews, QR codes and density limits. Cash transactions are disappearing in favour of electronic payments and the ‘buy now, pay later’ concept has exploded. The business landscape has changed with many businesses forced into hibernation and sadly, some becoming extinct.
While the pandemic has posed a threat to lives and livelihoods, there’s clear evidence that people have struggled to balance the hybrid work model particularly when combined with home schooling duties. The impact on people’s mental health is real with increased anxiety, employee burnout, absenteeism, and a drop in productivity. After 18 months of uncertainty people are doing a lot of soul-searching and a chunk of the population are re-evaluating various parts of their lives including their employment or self-employment. According to Microsoft’s 2021 Work Trend Index, 41% of the global workforce is likely to consider leaving their current employer within the next year, and 49% of those plan to make a major pivot or career transition. As a result, we expect a surge in business start-ups in 2021/22.
While the reasons to branch out and start a new business seem logical, be warned because entrepreneurship isn’t for everyone. It can be a hard road and if you need supporting evidence, talk to any business owner about the roller coaster ride of the last 18 months. You need to be resilient and have more than just courage, a good idea and plenty of passion. Statistically speaking, the survival rate of new businesses isn’t encouraging with around 20% failing in the first year and around 50% not surviving beyond year five.
Let’s look at some of the main reasons why businesses fail.
1. The Wrong Person
Many businesses fail simply because of their founder. When you start a business, you’re probably operating on a tight budget, so you have to multi-task and fill the roles of inventor, production manager, receptionist, bookkeeper, cleaner, marketing manager and webmaster. You have to juggle a lot of balls in the air while you’re on the run. Too often you become a ‘jack of all trades and master of none’.
While entrepreneurship sounds attractive, most successful business owners are disciplined, determined, organised, passionate, skilled, and creative. It can be a fine line between success and failure, and you need to be resilient because you’ll need to make sacrifices, work extended hours, and manage pressure and stress.
New entrepreneurs can get swept up in the excitement of starting their own business and in the rush, they bypass some important steps and check points. Attention to detail is important and there are a number of key decisions to be made in the set up phase including business registrations, choice of accounting software, adequate and appropriate insurances, finance and of course the business structure.
In the internet fuelled world, a great product or service isn’t enough to build a successful business. Enthusiasm, money, hard work, talent and a great idea are usually ‘must haves’ but they don’t guarantee business success. Being a good technician is not enough anymore as you need to be able to manage the business including the compliance aspects particularly if you plan to grow and employ staff.
Successful entrepreneurs work ON the business, not just IN the business. You might be a great technician but lack the accounting, legal, HR, marketing, social media, and website skills. Understand your strengths and delegate your weaknesses. It might cost you more in the short term, but your opening moves are critical. Rushing the set-up process or pulling the wrong rein can have catastrophic financial consequences.
You also need to be starting the business for the right reasons. If your motivation is to make lots of money, stop having to answer to the boss or have more freedom and time with your family - be prepared for a long and winding road. It’s not that easy and only a small percentage of business owners get to enjoy those benefits. It can take 10 years of toil to become an ‘overnight success’. The right reasons for starting a business might include the fact that you have a real love for what you are doing and based on your research there’s a market for your product or service. If you have the skills, understand the risks, and have the DNA of an entrepreneur, make sure you also have the funds and business plan to bring the business to life.
2. Failing to Plan is Planning to Fail
In business and in life, failing to plan is planning to fail. Building a business is akin to building a house that requires solid foundations and a master plan. Your business plan must be realistic which requires you to make forecasts and projections using data from your research. It is the blueprint for your business success and details your goals and how you plan to meet those goals.
It should also identify the likely problems you might encounter and how you plan to overcome them. Your business plan should list key tasks, a timeline for implementation and identify who is responsible for performing the tasks. The plan should incorporate a marketing plan and a financial plan including a cash flow forecast for the first 12 months of operation. Given you’re starting the business from scratch, you’ll need to make a lot of assumptions but without a financial forecast you can’t prove the viability of the business.
To secure finance from a bank or third party you’ll need a professional plan. You could burn a lot of cash and probably burn yourself out trying to push square pegs into round holes so if the numbers don’t stack up it’s time to go back to the drawing board. Think about putting your largest expenses under the microscope and see if they can get a ‘haircut’. What about your prices, could the market handle an increase and what impact would that have on your projected profit?
Could you source cheaper inputs from suppliers without compromising the quality of your products? Could you manage to operate from smaller or cheaper premises in the short term? Could you outsource some of your marketing? Could you lease rather than purchase some of your equipment or vehicles? Could you offer additional related services to increase your revenue and are there new markets you could try without stretching your resources or finances? Punch the changes into your budget and see if that makes the business viable.
Planning involves researching the market including the prices and your competitors. You need to know the suppliers, their pricing plus study the industry trends and latest technology and software. In business it’s survival of the fittest, fastest, and smartest so do your homework and get educated on the things that matter. Monitor your competitors online and see what’s working for them and learn from their mistakes. Develop a point of difference and think about what you can innovate with your products, services, and marketing.
3. Lack of Cash Flow or Working Capital
Plenty of start-ups crash because they run out of cash. This can often be a symptom of bigger problems like bad financial management, a lack of planning, poor marketing or a bad product or the wrong location.
While it’s never easy to do financial forecasts for a business with no trading history, you need to make a lot of assumptions and entrepreneurs often make two obvious mistakes when preparing their cash flow budget. They:
- Overestimate their projected revenue
- Underestimate their expenses
When preparing sales forecasts, you need to look at the best and worst case scenarios. You then need to ensure you have the financial resources to survive the worst case scenario. You also need to understand the difference between sales and cash flow. What percentage of sales will be in cash and what percentage will be on credit with customer accounts? For the customers you extend credit to, what are their terms and when will you receive payment? A miscalculation can trigger an immediate need for finance and banks generally don’t respond well to urgent calls for finance.
In start-up mode, you’ll always find there are extra expenses you didn’t factor into your budget. These unexpected costs always pop up and we often see the budget for product development and shop fit out costs blow out. Marketing costs are hard to pinpoint with accuracy and equipment prices can change. Again, your cash flow budget is critical, and it should calculate how much money you will have on hand at the end of each month. You need to identify any shortfall well in advance to arrange finance including an extension of your overdraft or new loan.
Build your cash flow budget commencing with your one-off start-up costs and don’t forget brand development, website, IT requirements, shop fit out, equipment, furniture, and fittings. Factor in professional fees and the cost of licences and business registrations. From there, identify your fixed costs (rent, phone and internet, insurance, rates etc.) before you work on your variable costs that change based on your level of sales. For example, how much stock do you order for your initial order? Stock is really your money tied up on the shelves or in the warehouse, so inventory control is a crucial part of business management.
No matter how brilliant your idea, if you can’t make it profitable or scalable, you won’t have a successful business. As accountants, we can help you do some financial modelling and prepare forecasts based on ‘what if’ scenarios.
4. Marketing, Website and Social Media
If your business relies on foot traffic, the wrong location can prove a disaster. In the digital age, if your business relies on on-line traffic, a poor website or a lack of social media activity could prove fatal.
Most start-up entrepreneurs invest a huge amount of time and money in their new venture with research and development, a shop or office fit out, new plant and equipment, professional fees for accounting and legal advice plus inventory. These may well be essential, however, too often new business owners put the cart before the horse because all the planning and investment will amount to nothing if you don’t have customers.
Let’s be honest, how can you estimate your sales if you don’t have a marketing plan? It needs to be a priority not something you piece together just before you launch the business. The plan should detail how you plan to use both digital and traditional (offline) tactics and if you’re expecting a queue of customers the moment you open your doors, you’re in for a shock. If you think all you need to do is build a website and customers will come, think again. You’re not going to be inundated with online orders within days of your website going live because Google can take three or more months to index your content. This means your content could be invisible on the internet for months after going live.
Increasingly your marketing focus needs to be online because potential customers start their research online and your website is probably going to be the first touch point with them. You only get one chance to make a good first impression and an amateurish website (or no website at all) is marketing suicide in the digital age. The web is full of poor websites that are nothing more than ‘online brochures’ that simply list the who what and where of the business. If you’re looking to penetrate the market with your start up, your website has to be outstanding with calls to action on every page, lead magnets and videos. As such, you need to plan the website build early in the process.
Think about your ideal type of customer and produce content (text on website pages, videos, blog posts, articles, white papers, webinars, and e-books) that is relevant, interesting, and valuable to them. The mission is to appear on the first page of Google searches for keywords and phrases, but you need to understand, search engine optimisation (SEO) requires research and planning. The purpose is to communicate your expertise, build trust and demonstrate to potential customers how you can help them. Think about what topics and issues appeal to your target market because the content is what fuels your social media, blogs, webinars, and emails. Ideally, your content should be original, educational, helpful, or entertaining, rather than promotional or sales-oriented.
You can’t afford to ignore social media channels like Facebook, Instagram, YouTube, Twitter and TikTok but you need to research which platforms your target audience engage with because there’s no point choosing Twitter if your target audience isn’t on it. Similarly, you can’t afford to ignore Facebook if 70% of your target audience are active users. It’s horses for courses and strategic marketing involves delivering targeted messages at the right frequency using the appropriate resources. The beauty of digital marketing is it’s a level playing field that allows start-ups to compete with established high profile big businesses.
If you haven't already downloaded our e-Book, ‘The 1 Simple Secret to Growing Your Business' you can download it for free from our Marketing page. It documents a 'winning website formula' that will help you design a high performing website.
Businesses don’t succeed by accident and yours won’t either. Without doubt, planning is the most important ingredient and the adage, ‘people don’t plan to fail, they just fail to plan’ certainly applies. A lot of start-ups fail because the founder simply didn’t do enough research and planning. This serves as both valuable advice and a warning for budding entrepreneurs looking to start a business.
You need a business plan that details the strategies, tools, technology, tactics, and resources you plan to use. Your game plan must prove the business is financially viable so it must incorporate a financial plan and marketing plan together with a timeline of when tasks should be completed. Successful business owners research new and emerging technology that could revolutionise their industry and monitor their competitors. They develop points of difference, systemise their operations, track changes in consumer behaviour and carefully monitor industry trends.
The list of reasons why businesses and particularly start-ups fail is long. The wrong person with a lack of a lack of management skill, inadequate cash reserves, poor planning and the wrong marketing mix are all red flags. The wrong location, no website or social media, poor quality products, the wrong pricing, bad timing (economic issues) and a lack of demand are other factors. Sometimes expanding too quickly can bring a business to its knees and conflict between key people is a time bomb ready to explode. Many bankruptcies have been caused by rapidly expanding businesses who simply couldn’t keep up with the production requirements, raise more capital or have the right systems in place to cope with a surge in sales. Running a business can be a roller coaster ride and high speed may provide thrills, but it can also kill. Burn out will bring a start-up business to a grinding halt.
Smart entrepreneurs recognise the fact that they can’t do it all on their own so they hire the right people and build a team that can grow the business. Bottom of FormIf you’re thinking of starting your own business we have developed a range of templates, tools, and checklists to help you get your business off to a flying start. We have consolidatedall these resources into our 32 page ‘New Business Starter Kit’ that you can download from our website (in the box on the right (or below for mobile viewers)). If you’re looking to build a successful business, we invite you to contact us today.
This article forms part of our Business Accelerator Magazine. Download the latest edition HERE or browse other articles from this edition below:
- Government Locks in Government ID Deadline See also How to Set Up Your Director ID
- ATO’s New Stapled Super Fund Rules – What Do Employers Need to Do?
- Preparing to Sell Your Business
- The Key Ingredients for Business Success (Part 2)
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Disclaimer: This newsletter contains general information only. No responsibility can be accepted for errors, omissions or possible misleading statements. No responsibility can be accepted for any action taken as a result of any information contained in these articles. It is not designed to be a substitute for professional advice and does not take into account your personal circumstances.