By Chris Chapman, Managing Director, My Business FD
In the UK one new business is created every 10 minutes and while none sets out to fail, for many this will be their fate as around one in three UK businesses cease trading in their first three years. Looked at more positively, that means that around two thirds go on to thrive, but what is it that sets these successful ventures apart?
My Business FD has years of experience in working with start ups and SMEs and is uniquely positioned to pass on the lessons learned to help steer a business on a course to success and, perhaps more importantly, to avoid the pitfalls that can lead to failure.
Ensuring a safe future for UK small and medium enterprises (SMEs) is critical. The Federation of Small Businesses states that SMEs account for 99.9 percent of all private enterprise in the UK, have a turnover of over £3bn per year and employ almost 23 million people.
Clearly, SMEs are powering the future of the UK economy. To help them achieve success My Business FD joint managing director Chris Chapman has set out the top 10 reasons why SMEs fail — and how to avoid them:
1. A good idea is just the start. Passion and hard work are important, but they are just the beginning. As the contestants on TV show Dragons’ Den prove, plenty of people have business ideas, but only those that have good understanding of their financials and have identified a clear, lucrative market are viable investments. To secure finance you will have to present a compelling, coherent and watertight business plan. Try to run your ideas past any contacts you have in the industry to spot any flaws before you present it to investors. Don't rely on friends and relatives, they’ll just tell you what you want to hear because they don't want to hurt your feelings
2. Failure to plan is planning to fail. It sounds trite, but it is so true. The core of any successful business is robust, realistic planning. You need to have a firm grip on all the details of your business with a good understanding of what you are going to do and how and where it will be done. You need a financial model that shows a realistic projection of how the business will perform in different scenarios.
3. Make a plan, but don’t stick to it. Writing a cogent business plan is the foundation for any successful business, but it must be flexible and regularly updated to reflect changing markets. The smart business owner is able to adapt his ideas to take advantage of any new opportunities and to stop pursuing unprofitable enterprises. As the military saying goes, no plan survives contact with the enemy!
4. Know your market. Just because you think something is a great product, that doesn’t mean that anyone else will, so you need to research your market to ensure that whatever you are offering will sell and that it fulfils an actual need. Just as a house is only worth what someone will pay for it, the same rule applies to products or services.
5. Money, money, money. Without money you can’t start or grow a business. Most small businesses start with funding from directors, friends and family. But if a business is to grow it needs to look beyond these immediate sources of finance to angel funding, banks and venture capitalists (VCs). Around half of SMEs use external finance to grow, but while the situation in the UK is looking more positive — lending to businesses rose to £238m in May/
June 2013, with SMEs borrowing £170.4bn — it can still be tough to obtain finance. To put your business in the strongest position to secure funds you need a financial model that shows how much cash you need, when you need it and how it will help to deliver a return on investment.
6. Keep a firm grip on your cash. Cash is everything to small businesses — you absolutely have to understand and live by a rolling cashflow forecast. If you lose control over your cashflow this will damage your reputation with the very people who could help you out; investors. So make sure you can finance your business plan or any proposed change of plan. More businesses fail because they lose control of their cashflow than any other reason.
7. Know your weaknesses. As an owner-manager it is easy to get bogged down in the day-to-day running of your business. This is understandable as entrepreneurs are so close to their company, but as a business begins to grow there are not enough hours in the day for one person to run it. You need to think about the bigger picture and developing strategy, so it’s essential to put a strong management team in place to handle those areas where you may not have the expertise required, such as finance, logistics, sales, production and HR. Recognise your weaknesses and surround yourself with experts, your investors will appreciate it and may even pay for it.
8. Don’t grow too fast. Everything is running smoothly and then you are offered an order that would treble your business, but before you crack open the champagne, stop and examine how it will affect your business. It will certainly require you to re-plan your strategy. You may need more staff, premises and investment to fulfil the order successfully. Whatever you do, don’t commit cash you don’t have and end up disappointing the customer, as this will put your whole business at risk. Instead discuss the order with your investors and talk to your bank to get the support you need to successfully meet the order, before you accept it.
9. Keep an eye on the competition. Imitation is the sincerest form of flattery, but in business it can be costly. If your business is doing well there will soon be others who want a slice of your cake. They might be able to provide similar products faster or cheaper or you may find yourself up against an established name that can use its brand to aggressively market to your client base. Always keep an eye on the competition and be aware that you may have to adapt to survive. Remember that if you do need to change your business model keep your investors and bank informed and make sure they are on board with your new direction.
10. Communication is key. No one likes nasty surprises, but investors and banks are particularly unhappy with them. It is vital to keep the channel of communication open with the organisations or individuals who are financing your business. If you ensure that they are up-to-date and happy with business developments you will win their trust and are more likely to gain support when you need more funding or help during tough times.
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