If you are starting a business, you probably know the scary statistics on failure rates. Most surveys suggest a business failure rate of more than half in the first two years. Those sweeping statistics, though, conceal many variations .
For example, the Financial Times reports that failure is influenced by geography . Yes, a high percent of London start-ups fail, but then, London is a huge magnet for start-ups – entrepreneurs ready to give it a try. Businesses that survive in London tend to achieve very rapid growth (reaching a £1 million annual turnover in a few years). Elsewhere, failure rates are lower but success less dramatic.
It might be useful to look at causes of small business failure in categories such as 1) start-up mistakes that can be fatal, 2) operating mistakes that can be fatal, and 3) growth/expansion mistakes that can be fatal. We will give just a few examples of each.
Why are you starting a business? Chiefly to make money? Because you always wanted to own a restaurant? Starting with a commitment to a type of business can be risky. This is because among the first questions to answer are firstly, “Is there a strong market/strong demand for my product or service?” and secondly “Are other businesses already meeting and more than meeting that demand?”.
For example, do existing restaurants in the area in which you’re planning to start your new restaurant venture have as many or more customers as they can handle? Because your initial challenge is to identify a demand, or a need, to meet. What part of the market is under-served? In what region or location? Research and surveys may be available to provide the information you need. You also can do some informal research, and observation, on your own.
Does your start-up plan identify the required investments? What money and other inputs (time, for example) will the business demand—and have you attached budget figures to those requirements? You probably know most start-ups have far too little capital to operate for the two or three years that may be required before there is adequate cash flow. If you are not succeeding in a year’s time, the circumstances will be unfavourable for another bank loan.
Operating to achieve positive cash flow
Who will do the bookkeeping and accounting? Ultimately, unless your capital is unlimited, the survival of the business is not ensured until you have revenue that at least matches expenses. How you operate from the start should be dictated by watching cash flow. It is shocking how many people getting started mostly on their own make no provision for bookkeeping. For example, the purchaser of a single new rental-income property may pay for maintenance, repairs, and work-related travel with his personal credit card. That can be fatal for many reasons, not least lack of any record of expenses to write off against rental income when tax time arrives.
Are you doing enough of the right kind of marketing? If your business is on a busy street with heavy foot traffic (likely a very expensive place to rent), you may have a natural flow of customers. Businesses located in populous areas (also e.g. along major motorways), invest heavily in location but tend to have customers located elsewhere. With an online business, only marketing will bring the customers so the lack of a physical office/shop location in a certain area means there won’t be a natural flow of potential customers. With the existence of the internet, business start-ups today have a huge advantage (but also a lot more competition). A lot of marketing is free nowadays (except, for the initiative, time, and effort required). Before you start your business, even a real-life service operation, learn the basics of online marketing via a webpage, email, LinkedIn, Facebook, Google Ads, and similar channels.
Vast majorities of customers begin shopping online – with a simple search. The predominant search engine is Google, of course, and you need a presence on Google for searchers. Check out Google’s clear provisions of local business listings . It’s not all completely free, but it must not be overlooked.
Building on success while avoiding failure
Did you do your market research and budgeting – again? Even given the high early failure rate, some start-up businesses do survive much longer. And with the right consumer demand, the right product or service to meet it, and marketing to tell customers about the business, growth can be rapid. Growth brings up the pleasant option of expanding. But expansion, even on the crest of success, has pitfalls.
Expansion of your business is like a new start-up. The same questions apply. Is there a strong, under-served market for more of my products—or new products I intend to introduce? Do I have the necessary capital for the new investments this will require? Do I have a plan that takes account of changed circumstances? How about the very real possibility that I personally will not be doing everything—as I did when I started and succeeded? Am I prepared to be not only the owner and manager, but also a supervisor? To handle pay, benefits, training?
The failure of a business in the expansion stage is common. It is in some ways more painful to contemplate than early, initial failure. Your success has given you assets and other strengths, though, and now you need to know if they can provide the present and future business with what they need to succeed.