As many as half of all businesses fail in their first three years of trading, and the recession has wiped out many well established businesses over the past few years. Nevertheless, in 2013, almost 530,000 new businesses were registered with Companies House, so how can these new ventures secure success?
There are a number of specific things to watch out for in order to ensure business success:
Increased competition from larger businesses
Increases in competition from larger businesses have been especially noticeable during the recession as they make use of their size and buying power to reduce costs and therefore selling prices to levels which smaller businesses simply cannot compete against.
As a small business, one of the best ways to protect against this threat is to carry out industry research to ensure that you know who your competitors are, their size in relation to your business and the support network they have in place.
Lack of Sales
A lack of sales is not only a particular problem for a new business but can also apply when new product lines or services are introduced in existing businesses.
So, how can any business address this problem? Markets can be unpredictable and potentially unstable, particularly in a recession, but carrying out market research will help to eliminate as many problems as possible in the early stages. By researching the target market and local conditions, inappropriate products or incorrect pricing should be identified and corrected before, or soon after, the business commences.
Market research is an expense which many business owners try to avoid, but it can provide valuable information and prove to be cost-effective in the long term.
Gaining credibility for a business venture can be extremely difficult and so market research is important to assist in obtaining finance for the business.
To protect your business against loss of customers, companies should aim to have a mixed range of customers, in different industries and avoid over reliance on just one or a few key customers. By doing this, your business will be naturally protected against one customer going bust, or a dip in a particular industry.
Poor cashflow is a key problem for many owner managed businesses as many owner managers tend to have good knowledge in their field but little experience of managing other aspects of the business, including cashflow.
It is important to ensure that the business has enough working capital to meet day to day cashflow requirements.
Turnover Rather Than Profit Led
It is easy for business owners to focus on sales growth and be overoptimistic about the level of sales which can be achieved, especially in the early years. Very few such entrepreneurs actually have any solid facts behind their projected turnover figures. As previously mentioned, market research is very important to ensure that the expected market share is realistic.
Many business owners also tend to focus on trying to increase sales, instead of focusing on controlling costs and increasing profits. Preparing an annual business plan to include a forecast profit and loss account can help to identify all potential costs to ensure they are considered when calculating selling prices. This will also give you a valuable measurement tool to compare with the actual performance of the business.
Taking too Much out of the Business
Some business owners like to take large amounts out of their business, either by way of drawings, salaries, bonuses or dividends – but is the amount realistic? It is better to have lower income from a sustainable business than higher income over a short term.