We’ve compiled a list of five common reasons startup businesses fail and how you can overcome each of them to give your business its best chance to succeed.
Before we get into the five reasons we’d like to summarise this blog post in three words: Business. Is. Hard.*
1. No market demand
When starting up a business it’s important to make sure that there is demand for your idea.
Research your target market thoroughly and reach out to them to find out whether they would be willing to part with their hard-earned cash for your product or service.
Make sure the product you are selling, be it a gluten-free cake or a taxi ride, is compelling enough for the customer to choose you over another supplier. The best businesses solve a problem or even provide a solution to a problem people didn’t even know they had.
Your product should make your customers’ lives better in some way. And your product should be different or better than your competitors. Preferably both.
2. Cash constraints
Most ideas depend on an upfront cash injection to get them off the ground, even if it’s just a small sum of money. This money can be spent on things like equipment, fixtures and fittings, stock, marketing or professional services.
Many businesses fail because they simply run out of cash – either as a result of underfunding or reckless spending. Budgeting properly will help to minimise the risk of overspending.
This can be done by creating a spreadsheet detailing your estimated upfront costs and how long it may take to recoup these. Then put together a cash flow forecast so that you can see what your anticipated incomings (sales) and outgoings (cost of sales, overheads) are, and what your cash reserves are likely to be at any point.
We have seen many businesses that appear to be doing well – a healthy order book, a decent profit margin, good clients – yet they still fail because of poor cash management. Once your business runs out of cash, and you can’t release any more, then your business is finished. CASH IS KING!
Our business advisors will help you put together a realistic personal survival budget, sales forecast and cash flow forecast while applying for our loan. We appreciate that a lot of guess work is involved in forecasting but, the more you do it, the more accurate your ‘guesses’ become.
3. Winning customers
Let’s be brutally honest – winning customers can be both incredibly difficult and expensive. Do not assume people will buy your product just because your mates think it is awesome.
When doing a sales forecast, be as honest and realistic as you can. Winning clients generally takes twice as long as you expect (we know businesses that have spent not months, but years, nurturing a relationship with a client before they raise a purchase order. And, bearing in mind point number two above, if it takes twice as long to win a client that you anticipated in your sales forecast, not only does it cost twice as much money, (driving to meetings, buying them coffees, taking them to events, sending them Christmas cards), but it also takes twice as long for cash to start coming in. Your cash flow has to take a double hit.
If customers just aren’t biting, refer back to point one. Is your product compelling enough in the first place?
4. Not understanding customers
Failing to understand customers is one of the most common reasons businesses fail.
Although there might be demand for your product or service, you might have missed the mark somewhere else. Consider the following:
- Have you marketed to them in the right places / is your business in the right location?
If your potential customers don’t know about you, then they can’t buy from you.
- Is the price point right?
If your product or service is too expensive (or too cheap!) it could underperform.
- Is the quality not as expected?
If the end product or service is poor, then you’ll end up with disappointed customers that won’t return.
5. Poor execution
You don’t need to be a genius to think of a half decent business idea. Entrepreneurs should be generating ideas all the time: In the shower, new idea. Over lunch, new idea. Playing Pokémon Go, new idea. Thinking is easy. We do it all day long. Doing is the tough part.
The key to a successful business is not the idea itself but the execution of the idea. Many people are obsessed with their idea being unique. It doesn’t need to be. McDonalds and Burger King both do OK.
Bringing your ideas to life is hard. It involves many long days, many mistakes, many missed nights out with your mates. The best entrepreneurs are stubborn, determined, tenacious and resilient creatures. They will not be happy until they have built the best mobile app in the app store, the best micro-pub in Macclesfield, or the best dog-grooming parlour in Dagenham.
And once your product or service is ready to take to market, the hard work begins!
*But it’s also possibly one of the best things you could choose to do in life.
If you’re considering getting in touch with us to find out more about our start-up loans and business mentoring, you can read all of our reviews HERE, and find out more about our services HERE.