Running your own business is something of a rollercoaster ride. The sheer thrill is occasionally replaced with moments of terror, and for every ‘up’ you experience you’ll face an equally stomach-lurching ‘down’.
Although you can’t entirely control the route the ‘coaster takes, you can ensure a smoother ride by avoiding the biggest pitfalls.
Today on the RotaCloud blog, we look in detail at the most common factors that contribute to the demise (or stagnation) of a small business. It might make for grim reading, but being aware of the biggest risks is the first step to avoiding them…
Why do small businesses fail?
According to the ONS, only 40% of small businesses make it to five years old. This figure may be a little higher than you expected, but to put it in other terms, there’s only a two-in-five chance of your new company making it to 2022 intact.
Small businesses fail for hundreds of reasons which can broadly be split into a handful of categories:
Of course, in most situations, a combination of these factors are responsible for a company’s failure. Let’s look at some of the biggest pitfalls in more detail.
Almost every business fails because the numbers don’t add up. We’ll start off by looking at the instances where financial mismanagement can directly lead to failure.
Not knowing the numbers
You’re the ideas guy: you can leave the numbers to your accountant, right? Wrong.
As the business owner, you must be aware of the financial state of your company: turnover, gross and net profit, costs, stock levels, average debtor days and, perhaps most importantly, your bank balance.
Without this knowledge, you make every business decision blindly.
Avoid it: Don’t fall behind with your accounts and track key metrics. Consider using accounting software if you can’t afford to work with an accountant.
Late payments are the bane of many a small business. In fact, research from Sage estimated that the average SME is owed £11,000 in overdue payments.
Without the resources to systematically and successfully challenge clients who pay late, small businesses often have to operate with extremely restricted cash flows.
Cash flow problems will not only slow down a company’s expansion plans, but will also reduce the promptness of your own payments, causing issues with your suppliers. The worst case scenario here is obvious: you can’t pay your tax bill, your staff, or your suppliers, so you’re forced to shut down.
Avoid it: Take a robust, structured approach to credit management and improve your financial visibility. Check out our in-depth guide to tackling cash flow issues, too.
Loans can be incredibly useful for fledgeling businesses, but there comes a certain point where the debt burden gets out of hand.
Of course, it’s not easy to predict when debt will become problematic – there are so many variables involved that you can never be certain.
This is one of those pitfalls that you won’t see coming until you’re on the precipice – but merely being aware that it’s a potential problem might just be enough to protect your business from its impacts.
Avoid it: Again, financial visibility is key. Don’t rush borrowing decisions and if in doubt, always opt for slower, sustainable growth.
New small businesses struggle with effective people management simply because of a lack of expertise. Although poor management won’t cause too many problems when a business only has a handful of employees, as more staff are hired the issues will be compounded.
Lack of delegation
Business founders often struggle to relinquish control over day-to-day business operations. It’s understandable: when you’ve put blood, sweat, and tears into a business (not to mention countless 12-hour days), it’s little wonder you become overprotective.
The problem occurs when founders are reluctant to expand the team because they’d rather maintain control over projects instead of spending the time assigning and explaining them to employees.
This is damaging for two simple reasons:
- You’re not spending time on more important matters such as the business’s long-term strategy.
- You may not have the skills to complete the project efficiently and successfully.
Avoid it: Identify the most suitable person for a task or project, then clearly communicate the goal and key points. Check back with the employee on a regular basis, but don’t micromanage. Don’t be afraid to hire.
Poor strategy communication
You might have a five-year company strategy laid out, but unless you communicate this with employees they’ll hardly be motivated to help achieve it.
New managers and business owners often fail to adequately explain how an employee’s work fits with the company’s long-term plans. Employees want direction.
If you share your strategy with your staff, you’ll also help them think for themselves.
For example, if you explain to your copywriter that you’re planning on expanding into a new region next year, they’ll be on the lookout for any relevant news stories or resources that might help the rollout go smoothly, and they’ll also be able to start brainstorming content around this topic.
Avoid it: Be open with your employees. You don’t need to share precise figures, just talk about broad goals, strategy, and how each individual can contribute. Of course, it helps if you have a plan…
Being too nice
Business founders may be keen to create a 21st century, ‘millennial-friendly’ workplace where employees find it easy to talk to their managers openly, but managers must recognise that there’s a difference between being a friendly manager and being a friend to employees.
By trying to be the nice guy, you could easily let standards slip. If an employee isn’t coping with a task, you might offer to take over instead of asking them to persevere or arrange more training.
You might also be reluctant to criticise employees, discipline them or push them out of their comfort zone – but in the long run, employees will be pleased to have been challenged.
Avoid it: Stay professional, enforce deadlines, provide constructive criticism and hold employees responsible for their work.
You can still be friendly – but remain aware of professional boundaries. Also, remember that you must be prepared to potentially fire every employee that you manage, if necessary.
Hiring friends and family
It feels great to be able to employ your friends. You know they have the qualifications and experience for the role, and you know you can trust them to do a good job. You’re also able to help out friends who might have been struggling to find work.
However, your unemployed friend might not actually be the best person for the job – without a hiring process, how would you know?
Also, what will happen when times get tough? Stress and frustration at work will spread to your personal relationship. You might lose your friendship for good.
Avoid it: Always carry out a hiring process and be honest with friends and family about the downsides of working for you. Both parties must understand that you have to treat your friend as you would a normal employee.
Marketing and Sales
These aspects of business can play a significant role in its success, or its demise. When times are tough, this is the first area where costs are cut. Avoid these traps to make marketing and sales fruitful rather than draining.
Your brand must set your business apart from all others in your sector. If it doesn’t, your business will almost certainly fail to last.
If you’re unable to find your own ground in a crowded market, you’ll be nudged out by your more experienced, better-equipped competitors.
Remember that a brand is more than just a logo and a brand name. It’s a personality, a set of values, a way of thinking. You must be able to easily define your company brand and communicate its values with consumers to truly make an impact in a market.
Avoid it: Your brand must be developed in sync with your product. Don’t make it an afterthought. As early as possible, define your values and stick to them.
A focus on price competition
Many founders assume that the easiest way to make a mark as a new business is to be price competitive with the established players. The problem with this route is that the big guns in your market have far more resources available to draw on should price competition become heated.
Established businesses will also have experience and expertise on their side. For many new companies, this is a battle that’s impossible to win.
Avoid it: Compete in other areas such as customer service, quality and brand. Don’t be afraid to price your product higher than your established competitors.
Too many channels
Direct mail, email marketing, local advertising, Facebook, Twitter, Instagram, PR, blogs… the list goes on. Now that are so many channels available for marketers to use (and often with no upfront cost), it’s tempting to launch campaigns across as many channels as possible.
With the limited resources of a new company, it’s a huge risk to spread your marketing budget across so many channels. Managing all these different platforms is extremely time-consuming and requires you to have an understanding of how to excel on each platform.
In many instances, this practice becomes impossible to maintain. Your profiles become sparse, and your marketing communications slow to a halt or become highly inconsistent.
Avoid it: Pick two or three marketing channels to start off, including at least one social media channel. Focus your efforts on these platforms and see how they respond to your efforts before moving on.
As the founder of your business, you probably think that your company provides the strongest solution in the market and that customers would be missing out if they chose any of your competitors over you.
Although you’re not foolish enough to assume that your product is right for absolutely everyone, you may be reluctant to define highly specific target markets.
As we mentioned above, you’ve only got limited resources to work with in your first few years. You might want to take on the world, but right now you need to make do with only conquering a small sliver of it.
In particular, targeting is king when advertising on social networks. Given the amount of user data these sites collect, you can easily target highly specific audiences.
Avoid it: Dedicate time to market research and analysis to narrowly define your target markets. Learn how to translate these defined markets into the targeting variables used on social media platforms.
Translating your brilliant idea for a business into a viable, sustainable company is one of the most difficult tasks you will face as a small business owner.
Every decision could make or break your business. The livelihood of your employees and their families is in your hands. With such high stakes, it’s vital that you get your business strategy right – you might not get a second chance.
You’re understandably excited about launching your brand, so you make quick decisions as required: choosing a website design, finding an office, and hiring your first employees.
You launch the product on-time but run into teething problems. The new marketing assistant doesn’t know how to use your blog software. Your website isn’t 100% complete. Your office is noisy and you’re tied into a long contract.
The launch is mildly successful, but you keep finding yourselves held back by the early decisions you made. You wish you’d looked around another office before signing on the dotted line. You regret offering the job to the first candidate who seemed reasonably competent at their interview.
Rushing decisions early on is an easy way to derail your company before it’s left the station.
Avoid it: Research your options. Contact references before hiring. Spend time on the foundations before worrying about the embellishments. Take it slow.
The wrong business partner
A strong business partner has a skillset that complements your own, shares your vision and passion for the business, and is someone you trust.
Enthusiastic entrepreneurs might jump into a decision about their business partner(s) too quickly. Business partnerships are easy during the good times, but when the business isn’t going so well, your partnership will be strained – and your business could be in jeopardy.
Avoid it: Take your time before settling on partnership. Ensure that you both understand the risks involved and how you’ll manage difficult and stressful situations.
Business targets may seem an old and stuffy concept, but they remain incredibly valuable. Without targets, you may struggle to work towards long term strategies, instead focusing on surviving each month.
Formalised targets ensure everyone is on the same page. They’re also a valuable decision-making aid.
Avoid it: Set a handful of key targets that meet the SMART criteria. Track your progress against them on a regular basis.
We certainly didn’t want to dissuade from going ahead with your plans to start a business!
Instead, we wanted to improve awareness of the traps that many enthusiastic entrepreneurs get caught in. These problems are, in most instances, relatively minor, but when combined with other factors or allowed to continue for too long, they can be fatal for your business.
Are there any business pitfalls you’d add to the list? Tweet us or comment below with your suggestions.