The top two reasons a start-up fails to become profitable is poor management and inadequate financing. That’s not all. Not having a business plan, ill-trained employees, a bad location, poor customer service and even fraud can all contribute to a start-up failing to gain momentum. In saying that, the following ten reasons are the most common causes of failure.
1. Not doing your homework
If you don’t do your homework and conduct a market analysis before you start a business, how do you know if your business idea will fly. Typically market research would fall into a segment in your business plan.
It’s critical to understand what industry you are going into and where the opportunities and threats lie. The way to overcome this is to conduct your market research upfront and understand market trends. It could be the industry is not very profitable, it might be too crowded at the top or you don’t have a strong point of difference. Answer this question first and your idea is more likely to fly.
Secondly, by defining the industry you are in, you then have an opportunity to work the left-hand side of the marketing bow tie and drill down into the segment and target market you want to operate in.
2. Not knowing who your customers are
If you don’t know who your customers are, where they live, what their needs are and how to reach them, you could be wasting a huge amount on marketing efforts for little or no return. A common mistake for a start-up is to throw money at marketing that doesn’t work.
The way around this as part of your market research, is to create buyer personas of your ideal customers. This exercise will tell you who they are, how old they are, where they live, what their buying habits are and how to reach them. It saves you money because you will know from this exercise what advertising mediums will resonate with each of your ideal customer segments saving both time and money.
3. Not fully understanding seasonal impact on sales
Not all products sell all year round. For instance, Christmas, Easter, Valentine’s Day or even spring summer winter and autumn. If you rely on a single product range that only sells at a certain time of year you could be in for a cash flow shock.
Instead try complimenting your products and service offering with additional products and services to even out your cash flow throughout the year. Tracking your sales by category helps to identify the ebbs and flows throughout the year and informs you what you need to focus on and when.
Aim for regular inventory turn-over if you sell products so you avoid tying up huge amounts of money in stock sitting on the shelf.
4. Failing to allow enough working capital
This is a biggie. If you don’t put aside enough working capital in the beginning to get you through the start-up phase until such time as you cash flow positively, your prospects for succeeding are dismal.
It’s important to set aside enough cash reserves to pay your ongoing living expenses while the business gets off the ground. This means paying yourself, your daily living expenses including rent and mortgage along with weekly business expenses. In your business plan you need to produce a cash flow forecast to determine how much capital is required until you become profitable.
5. Not understanding the sales cycle
Not all sales cycles are equal. If you sell high end products, you could be up against a very extensive sales cycle. It could take months and in some cases year or two to close a sale. Can you wait that long? Many businesses can’t which causes the business to crash very quickly.
Ensure you know what the typical time it takes to close a sale and allow enough capital to get you through while waiting. One way to expedite this process is to ensure you are always in front of the decision makers AND they are in the market to buy your products or services. In other words, work only with qualified leads and stay in touch with everyone else on a regular basis because you never know when they will be ready to buy from you.
6. Failing to price products and services correctly
The key to a good sale is a profitable sale. If you price your products wrongly and don’t account for overheads, shipping, and other uncontrollable costs, you could find you have lots of activity and sales which doesn’t translate into profit.
To mitigate this, decide what position you will take in the market place. Will you be the cheapest, offer the best quality and service, or the best value? You can’t be all things to all people. If you try, you will most likely fail.
7. Not understanding how credit works
You might offer 30, 60 or 90-day credit terms to your customers, but will they pay on time? Suppliers want to be paid quickly. If you are a new company just starting out, you may need to pay cash on delivery or cash up front. However, if your customers don’t pay you on time, you won’t be able to pay employees or suppliers. Consider how will this affect your purchasing power in the future.
Be sure you understand the time difference between buying inventory, providing a service and getting paid from your customers if you offer credit terms. Failure to allow for this could see you in the red very quickly with not enough cash flow to keep operating. Better still, don’t offer payment terms unless you really need to and allow enough working capital to compensate for slow payers.
8. Trying to do everything yourself
There is a fine line between starting a business and being able to afford employing others. If you do employ others, many entrepreneurs have a difficult time letting go believing if you want a job done well, you must do it yourself. This is fraught with danger. Unless you learn to let go, delegate and empower others, you risk burnout and or stagnation. You cannot be everything to everyone and you cannot do everything yourself.
Learn what your strengths and weaknesses are and employ others to cover what you are not good at. Alternatively use contractors and consultants as a short-term measure until you can afford to hire full-time or part-time staff.
9. Not growing your customer base
“Build and they will come” is not good business sense. Many entrepreneurs fall into the trap of putting all their eggs in one basket. With a few big customers. When you are over dependent on a few bigger customers, one day you will find you are at their mercy. Should they leave, this puts your business at risk. Over-reliance on a few customers is a recipe for potential failure.
Building a larger customer base is the answer so if one customer leaves for any reason, you can still remain in business. Furthermore, keep the top of your sales funnel full of qualified leads at all times. The danger is to wait until you have no leads then try prospecting which can set your sales back months. Be proactive not reactive when it comes to sales.
10. Lack of self criticism
Yes, you have a great business idea and one day you believe your own press. Lack of objective feedback means you could be compounding mistakes that puts your business at risk. It’s OK to be in love with your business, proud of your product and service offering and passionate about what you do, failing to let go, lack of willingness to seek help or share power are recipes for disaster.
Make sure you seek feedback not just from customers, from all stakeholders including your employees. Better still engage a business coach or mentor if you feel you have no one to talk to about your business ideas. As Henry Ford says”…
“Coming together is the beginning. Keeping together is progress. Working together is success!
11. Lacking management skills
Just because you own or operate a small business doesn’t mean you have any leadership or management skills. You might even have a fabulous business idea you are very passionate about. however, you cannot grow and operate a profitable business without the help of others. Others could mean employees, suppliers, customers or partners. People don’t like being bossed around and given orders. It’s imperative you learn how to manage people.
Invest in your leadership and management skills so that you can build trust and rapport not only with your prospects and customers, also manage and lead your team to success.
On a final note
By avoiding these top 11 common mistakes a start-up business will quickly become profitable.
In a Nutshell
- Do your homework before creating a start-up including writing a business plan, conducting market research and identifying your target market.
- Make sure you identify who your ideal customers are before launching your business business idea.
- Understand the seasonal impact on sales and mitigate the ebbs and lows with complimentary product and service offerings.
- Make sure you allow for enough working capital until you cash flow and make profitable sales.
- Not all sales cycles are equal. Understand the typical selling cycle in your industry and allow for working capital until those sales close.
- Make sure you price your products and service profitably – failing to do so will not only slow growth, it puts you at risk of going out of business.
- Understand the impact to your cash flow if you offer payment terms. Not all customers will pay you on time.
- Don’t take the high road and try to do everything yourself – if you want to grow you must learn to let go and enlist the help of others.
- Consistently grow your customer base. Never rely on one or two big customers because if they leave it puts your business at risk.
- A lack of self criticism means you put yourself on a pedestal. No business owner or operator is right all the time. Seek feedback not just from your customers also from your employees.
- Invest in your leadership and engagement skills particularly if you have never had a background in management.