Seven common reasons why small businesses fail

1. Your idea just isn’t good enough

If your idea isn’t commercially viable, your business will not succeed however much time, love and effort you put into it. Research your market and be aware that just because you are passionate about your idea, not everyone else will be. The chances are you will have to present this idea to angels/banks/VCs at some point in the future so, if you have a friend or contact in the industry, buy them a pint and run it by them on an informal basis first.

2. Lack of planning

Make sure you know what you are going to do, how you are going to do it and where you are going to do it. You should have a financial model that shows how you expect the business to realistically perform. I include a significant element of caution here, as not every deal will come off and the ones that do are guaranteed to take longer than you expect. It’s also wise to make a realistic assessment of the state of development of your idea/technology and what resources are required to bring it to a market. Gather sufficient market data to give yourself confidence that people will want to buy what you are selling in the regions you can access. Update your business plan regularly and, just in case I haven’t mentioned it before, make sure it’s realistic!

3. Insufficient capital

Without doubt you will need some money. Most businesses start with investment from the directors, family and friends before moving on to angel funding, then usually the banks and VCs as the business becomes more established. Your financial model will show you how much cash your business needs and when it will need it. If you can’t get the cash you require, then you will not be able to execute your business plan.

4. Poor cash management

You’ve got a robust business plan and the cash to execute it. Your plan will be in sufficient detail so you know what you should be doing and when you should be doing it. Sure, things will never quite go to plan but if you vary too much from your business model then, at best, you will not achieve what you set out to do. At worst, you will run out of cash. Worse still, your reputation with those people you will need to turn to for help (your investors) will be severely damaged and your chances of getting further investment to rescue your business will be limited. 

5. Weak management

You are going to need a strong management team. You may be a great entrepreneur but, without enough hours in the day, your focus is likely to be on the tasks you enjoy rather than the tasks that need to be done. Typically areas such as finance, logistics, sales, production and HR get neglected. Experienced, cost-effective part time help across all these disciplines is out there. Recognise those areas where you are weak and get some help. Your investors will expect it (and may even pay for it!).

6. Over expansion

You’re up and running and everything is going to plan. Then the order(s) that will treble your business drop through the door. At this point, stop! An order of this magnitude will almost certainly require you to re-plan your business. You may need more people, more investment, new premises etc. Whatever you do, do not immediately accept the order and crack open the champagne. Talk to your investors, talk to your bank – if you have a good track record to this point, it is likely they will support you through the expansion required. If you go it alone, you may commit cash you do not have, disappoint the customer and put your whole business at risk.

7. Competition

If your idea is good enough, there will be people out there wanting a slice of your cake. They might do it better or cheaper, or you may find yourself up against an established name that can use their brand to sell an inferior product. Keep an eye on the competition and be prepared to adapt. If you need to change your business model, change it and keep your investors and bank informed at all times. 

There is always risk in setting up a new business and while some fail, many succeed. If you have addressed all the points above you have a great chance of turning your idea into a thriving business. Good luck!

Chris Chapman is founder and managing director of www.mybusinessFD.com

Picture source

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