The majority of small businesses fail within their first three years of operation, and the cause for failure usually has something to do with planning or funding. Sadly, most people never stop to think about where they went wrong and what could have been done differently to prevent the failure of the business.
If you analyse the leading causes of small business failure, you can draw out a blueprint for success with the intent of avoiding these pitfalls in your own endeavours. Consider the following seven planning and funding mistakes that have lead to the downfall of many small businesses:
1. Underestimating operating costs
When creating a business plan, lots of people like to approach the challenge from an optimistic standpoint, attempting to create a situation in which the business can make as much profit as possible with minimal expenditure. While it is, in fact, wise to operate with the goal of maximising profits and minimising operating costs, it is absolutely imperative that you take a realist approach to planning. In other words, once you’ve added up how much it will cost to run the business on a monthly basis make sure you round up to the nearest thousand rather than round down. You want to leave room for miscalculations, not put yourself in a situation in which an unexpected expense could throw you for a loop.
2. Purchasing too much equipment or inventory at once
Most novice business owners have a tendency to be very excited and anxious about getting the ball rolling on a new endeavour, and this anticipation can lead to hasty decision making. The most important thing to remember when making a business plan is that very few things are constant or guaranteed, and almost everything you could plan for is subject to change based on market conditions and a slew of other factors. With that said, refrain from stockpiling inventory or equipment unnecessarily as this unwarranted investment will take away from the capital and cash flow of the business.
3. Entering into poorly thought out contracts with suppliers and employees
Remember that contracts you have with employees and suppliers will be binding so think carefully before committing to any agreements that could leave you short on funds in the near future if things don’t go your way. When hiring staff and securing suppliers the goal is to commit to paying for only what you need to get by. If the need for a more extensive payroll arises then you can always enter into new contracts in the future when the business is more stable.
4. Failure to create and adhere to an accurate and comprehensive budget
Although your budget should always be a work in progress, changing with your business demands and requirements, it is imperative to put forth your best effort in devising an accurate budget that will allow for the allocation of all predictable expenditure. Budgeting and accounting are practices you should engage in weekly with the aim of getting better at predicting and accommodating expenses.
5. Investing too much from the outset
Business owners and entrepreneurs who are launching a retail business, or one that involves collecting a return on investments, may be tempted to invest a lot of money initially to maximise profits. The problem with this is you’re putting all your eggs in one basket, and if your investments don’t pan out, you could take a huge loss. Try not to invest more than 20% of your capital at one point in time, especially when the business is not yet established. Limiting your investment potential to a predefined percentage of your available funds is a great way to reduce risk and prevent the possibility of losing almost everything in one wrong move.
6. Failure to examine financing options
Lots of business owners are afraid of going into debt, or have already damaged their credit score, and are therefore hesitant about applying for any credit-based financing. Although it may seem wise to operate without debt from the start and keep financial obligations minimal, sometimes there are business financing options available that would provide the funding needed to jump start your business.
Which leads us to the final tip:
7. Obtaining the wrong kind of financing at the wrong time
Another important fact to consider is the order in which you apply for different types of financing. Keep in mind that if for example, you obtain a £20,000 unsecured loan, that amount could show up as a negative balance on your credit report and the decision to obtain such a loan could, therefore, affect your ability to get approval for additional financing in the future.