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How to Prevent Your Small Business From Failing

October 5, 2015
Management

Small businesses fail all the time. Research has demonstrated that nine out of ten businesses will not survive two years. There’s always one key reason behind business failure - running out of funds, but how do you get to this point?

1. You’ve Started Your Business for the Wrong Reasons

Why did you start your business? Was it financial, to be your own boss or because you had no choice? The reason why you started your business is one aspect of business failure. If you're not motivated, then you won’t chase late payers or have the drive to complete jobs on time.

Running a start-up, or small business is tough, lonely work. You could work sixty or seventy hour weeks for little reward when you first start out.

So look to create a business where you have passion. Any passion can potentially be turned into a business, from watching films to woodwork.

2. Insufficient Capital

A common mistake is not having sufficient funds to start a business. Before you begin operating, you will need to have a clear idea of how much it is going to cost to run your business. You also need to determine how much money you need to live off.

You might have to take a short-term change in your lifestyle to fund your business. However, with the right mentality, it will be worth it in the end.

As well as looking at your operating costs, seek innovative funding sources. Grants, start-up loans and crowdfunding, can all help you maintain your business in the beginning months.

3. No Differentiation Between you and Competitors

It is highly unlikely that you are going to be alone in an industry. If no-one offers your exact product, they might offer a substitute. This competition is healthy for business and consumers. However, you will need to clearly differentiate yourself from your competitors.

If you don't have a unique selling point (USP) there is no real reason why customers should choose you over another.

Some considerations are:

•       Innovative technology.

•       Unique process.

•       Customer-centric service.

4. Over dependence on one Customer

It sounds great when you start, having one customer who is so valuable that your business can operate just on their expenditure. However, what would happen if that customer stopped buying from you? What if they stopped paying?

There’s a risk you would have to close up shop yourself.

Reliance on one customer places you at their mercy. You need to move away from this. Instead, look to acquire lots of smaller clients where a slight dip in spending wouldn’t make such a significant impact on your cash flow. This makes your business more secure and gives you a chance to reclaim revenue from new customers.

5. Poor Sales Funnel

Your business relies on your ability to sell your product or services. When it comes to a street side shop or market stall – you probably won’t have a long or complicated sales funnel. However, if you are an e-commerce, service-based or business-to-business organization, your sales funnel could be complex.

With today’s digital marketplace, online marketing is becoming a significant part of that sales path. Therefore, you need to include customers who find you online.

Not having a website is a bad decision, most customers use the internet to find new products or service providers (accountants, plumbers, builders, etc.).

In addition, website and email can be an important part of your sales funnel. They help identify prospects ready to buy and offers that might interest them. Also, most digital marketing activities can be done cost-free.

Clients of Halon Tax Grow Their Revenue by 18%/yr on Average

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6. Expanding too Fast

While business growth is desirable, and even necessary in some cases, overexpansion is bad. Without the right processes and resources in place, your business can suffer from costs spiraling out of control, a drop in product/service quality and customers abandoning you from the fallout.

Instead, you need to be realistic. Sit down with your staff and plan your growth, and expand only as resources and needs dictate. This might mean you have to turn away some work – but this is better than expanding too fast and losing everyone.

7. Not Managing Your Finances Properly

Another huge issue is not managing your financials properly. There are many ways this can affect your business.

Firstly, not managing income can sometimes mean you are missing those who aren’t paying on time. Bad debt is becoming a significant issue and big business. Over $100 billion of bad medical debts are sold every year to debt collection agencies.

If your small business can’t collect on debts, your cash flow will suffer, and you might not be able to pay your suppliers – who may call their debt collectors on you.

Create a system where you monitor payments, including who has paid and when, and who owes you money and how it is to be collected. A clear, concise process will save your business in the long-term.

Secondly, you might not be monitoring costs. When these start to rise, you might find your return on investment reduces and your profit margins get squeezed.

Look for good offers and don’t be afraid of swapping suppliers e.g. energy or a new payment system.

Finally, taxes are an important part of running a business. You need to ensure you are saving enough money to pay your taxes. The wrong amount can be disastrous. You might also miss tax deadlines or forget certain information in your tax documents that can mean your business gets a fine.

Accounting software or a professional accountant can support your business here. While they are a cost, they should prevent you from being unprepared and facing significant financial repercussions.

Conclusion

Your business is your life. You want it to succeed. So ensure you give it the best chance by not falling foul of typical reasons why businesses fail.

While money is often the main cause behind business closure, there is usually an underlying reason for a lack of funds. What is your business’ weakness? Have you prepared for the future by avoiding common business mistakes?

Christopher Ragain, CPA

Christopher Ragain, CPA is the founder of Halon Tax and one of the industries top authorities on micro-business taxation and tax planning.

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