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Pitfalls & Errors

Launching a small business carries risks and there is no guarantee of success. 20 per cent of new businesses do not make it through their first year and 50 per cent fail within three years.

Don’t let this put you off, but be ready for the challenges entrepreneurs face when starting a business. With hard work and awareness of the issues, a new business can be a great success.

Below are some of the most common mistakes new business owners. Bear these in mind as you prepare and plan your new venture to give yourself the best chance of survival and success!

Lack of market research

Researching your intended marketplace, recognising trends and planning to meet its needs are essential. This will prove that your business will be viable and sustainable.  It will help you establish a competitive price point pricing and ensure that the return will provide the business with enough cash to continue and develop.

http://www.startupdonut.co.uk/startup/sales-and-marketing/market-research

http://www.startupdonut.co.uk/startup/start-up-business-ideas/testing-business-ideas

You can access key statistics for your business planning here:- https://apps.geowessex.com/stats/

Inadequate financial planning

Money is the life blood of all businesses. Without sufficient capital the business is unlikely to survive and prosper. You must aim to develop a high quality finance plan as part of your business plan in order to attract and secure the right type and amount of funding.

Ensure that you understand the minimum level of sales required to achieve break-even and allow for unforeseen situations that could have a detrimental effect.

Whilst a business can survive lean times, it cannot survive without cash. Ensure that your plan allows for up cash reserves to be established as soon as possible. This will enable the business to survive harder times or be in a position to invest in new products/services, stock or people to take advantage of a market upturn without having to strain creditors or be dependent on finding external finance under pressure.

It would be a rare thing for new business owners to be able to be expert in every part of their business. Consider using the services of an accountant or financial adviser to complete your finance plan. This will make it more professional, complete and credible, especially if it is to be used as part of your business plan in order to attract external finance.

Unrealistic targets

It is easy to create a plan that shows your new business dominating your chosen marketplace by the end of its first year of trading, but will it actually be able to achieve that? If you forecast that kind of success and you do not achieve it, the credibility of the business will be badly undermined in the eyes of suppliers and customers alike, with serious consequences likely.

You must also be realistic about your market size – what percentage of the market must you take to achieve your forecast? Is that achievable? Be very careful not to spend too much cash on equipment, premises, vehicles, staff etc. in the early days, when the sales have not been established that support these. Make your cashflow and sales forecasts as accurate as possible through detailed analysis and consideration and you will be more likely to avoid such problems.

It can be very tempting to pursue sales volume rather than profit, especially in the early days when trying to get a foothold in the market. You must try to avoid being distracted from the core business at all times. Diversification too early may dilute the strength of the business and increase the chances of failure, through straining resources, cashflow and staff, such that the main thrust of the business is neglected and declines.

Writing a marketing plan will also ensure that you take into account your target customers, your marketing objectives and will help you set goals to address these.

Market intelligence

During the busy start-up phase it can be easy to forget to set aside enough time to monitor the competition. They are quite likely to react to your activities in order to protect their customer base from your approaches. This might include aggressive pricing, but is just as likely to be an additional service or a new product. You need to be abreast of the markets needs for the future and in a position to take advantage of new trends and products.

Make sure that you can gather market intelligence easily through staff, contacts, suppliers and customers and use this in your marketing plan.

Use this along with your market research plan credible targets and deadlines, and allocate appropriate resources to exploit the opportunities you have identified. From this point you can decide who to sell to, how and how much. This will be the basis of your sales plan

Weak supplier & customer controls

Common mistakes for new businesses include setting up unsatisfactory credit arrangements and not taking due care when choosing suppliers. Choose carefully as your business’ profitability and reputation could be at stake.

Obtaining your supplies at the right price is crucial, but so is reliability of supply. There is little merit in finding a competitive price point and then being unable to meet customer demand. Your customers are reliant on you as much as you are on your suppliers and trust is vital. Credit check them initially (and regularly in the future) to give an indication of their stability and the reliability of supply. Make sure that you understand their terms and they your needs, and that they can commit to this. Similarly ensure that the pricing structure is fully agreed and will not change suddenly. Consider making the commitment contractual.

Always credit check a new customer, and take up trade references, to make sure they can (and do) pay their bills. Delayed or even non-payment will reduce your cash available to run the business according to commitments to suppliers, banks, HMRC etc. leading in turn to refused orders, funding requests being turned down, heavy fines from the tax authorities. Credit ratings may also be affected, which will make it very difficult to find new suppliers on anything other than a “payment in advance” basis, which will further worsen the cash situation.

Lack of stock & asset management systems

Too much stock will tie up cash unnecessarily and can restrict your ability to trade effectively. This is made worse if the stock becomes obsolete, or goes out of date if perishable, at which point its value is reduced to zero. The ideal is to have the right amount of stock in the right place at the right time, so close monitoring of all movements is vital and a good control system will pay dividends by freeing up cash while still being able to meet demand.

Try to avoid buying too many fixed assets –machinery, vehicles, ICT, fittings etc. – as these will all have a detrimental effect on your capital reserves. Look at alternative methods of acquisition such as leasing, hp, or buying used equipment.

In the early years of your new business, you need to limit drawing on your cash reserves unnecessarily, try to spend cash only on items that are truly necessary for the business to continue.

Hiring the wrong people

The quality of your staff will be central to the success of the business. It is important to understand the skills and character traits required for each role before you recruit. Getting it right could make or break the business. Consider the job requirements – how will you group tasks, what are the time requirements for each, ongoing need or a one-off?  From this you can determine whether or not the positions will be full or part time, permanent or temporary, fixed term or contractor?

Using family and friends in the business can be one solution but can throw up as many issues. If they don’t have exactly the right mix of skills how much of a compromise can you afford to make? Will they feel they can pressure you into paying more for their services? If something goes wrong and you need to end their employment you may find pressure coming to bear from elsewhere.

The prospect of being independent is often a large part of starting your own business. However, knowing your own limitations and finding the right person for particular roles will be very important. It may be that your business will be based on your skills on the operations side but that will not necessarily make you the best sales person or administrator. Taking on tasks that you may be relatively inexperienced with can produce stress and demotivate you and your staff  and possibly even leave your customers feeling that your business is not up to the task.