Starting your own business is exciting. Whether it is taking what you have learned in a corporate environment and going alone, or taking a hobby or interest and turning it into a business. There are of course risks and it is often easy to overlook these when embarking on this exciting journey.
While there is no such thing as true job security, there are many things, that when working for someone else, you don’t need to worry about. These are the things that can easily catch you out when running your own business.
Here are some of the challenges you will face that could cause your business to fail.
Not having a handle on your sales estimates
When putting together a business plan, it’s always tempting to estimate sales by identifying the value of the market you are in and then saying “if we can capture 0.01% of that market, our sales will be x”. This is only setting you up for failure and sales estimates need to be based on validated drivers, for example, already having a client on board with signed orders. The other factor related closely to this is underestimating how long it will take you to achieve the sales you have planned. Remember that in the earlier days of your business, uptake may be slow because your product or service is new. Also, you might not be able to focus entirely on sales as there will be other priorities in the business that might need your attention.
Not properly managing your costs
You must understand the difference between fixed and variable costs. High fixed costs can easily sink a business. You’ll need to carefully think about whether or not you need your own office, employ staff, or sign up for expensive services. Regardless of the amount of revenue that you recognise, these costs will still be there. As your business begins to grow, you’ll still need to keep an eye on costs to ensure they stay within the limits you planned, i.e. as a reasonable percentage of sales.
Not understanding the significance of cashflow
There are so many examples of profitable businesses that have ultimately failed because the founders have not understood the significance of cashflow and how cashflow differs from profitability. Poor cashflow can result from several factors such as customers taking too long to pay. Think carefully about offering credit terms to customers and try to collect your money as close to the point of sale or delivery as possible. On the flip side of the coin, you also need to ensure that you are not paying your suppliers too promptly. It’s important that you stay within the agreed payment terms but don’t pay cash for something that can be paid for on 30-day terms. Finally, don’t invest too much in stock. There is a cost to holding stock and it also ties up the cash that you might need for other things, like paying your staff.
Failing to identify your market because of poor market research
This problem can manifest itself in two ways. Coming up with an idea for a product or service is great. Often this is because you see something missing in the market place. However, it is very important that you test this idea to make sure that there is, or will be, demand in the market. Many entrepreneurs fail to do this and just press on with developing and launching their idea. Even worse is when market research is done and the results don’t support the new product or service, and the entrepreneur still proceeds. It is difficult because we do fall in love with our ideas, but when there isn’t a market, we need to cut our losses. There are loads of examples like New Coke, Crystal Pepsi, and the MacDonalds Arch burger.
The other way that poor market research can trip you up is when you do have a good product or service but you are trying to market and sell it to the wrong market or at the wrong time. Great examples of this are Microsoft’s Zune player and Amazon’s Fire phone.
Underpricing your product or service
An ideal position is where you can dictate the price of your products or services. However, this is a very unlikely scenario as there will always be other factors in play such as competitor products services, customer price sensitivity, and the nature of your products and services. Competing in a commodity market is difficult as prices will be driven down and you’ll need to ensure you have a better cost structure than your competitors or be able to effectively differentiate your product or service from that of your competitors. In a less competitive or niche market you’ll have more latitude to set your price. Either way, you need to ensure that you do not underprice your product or service. Failing to make healthy margins means that you’ll struggle to make a profit and you’ll struggle to grow. There are many pricing strategies available and it is advisable to spend some time on pricing to ensure that you get this right.
Failing to retain your customers
Acquiring customers can be expensive and in some cases, profitability is as simple as the difference between acquiring a customer and the lifetime value of a customer. Retaining customers is less expensive than acquiring new ones and you need to ensure that you have the necessary mechanisms in place to keep customers happy and therefore retain them. Having a great product or service is key. You also need supporting customer service processes in place.
In addition to this, you need to make sure that your product or service is evolving to continually meet customer needs.
Not understanding how your business works
The core of your business is your product or service and having an in-depth knowledge of your product or service is obvious. Otherwise, you wouldn’t be in business. A point of concern for many entrepreneurs is having the skills to manage their business, i.e. the skills beyond their product or service. These are skills like sales and marketing, financial management, operations, and accounting. When your business is small, you are going to need to perform all of these activities. It is therefore vitally important that you have the necessary skills. As your business grows, you’ll employ (either full time or part-time) people to perform these activities. This doesn’t mean that you can abrogate your responsibilities for these functions and you therefore still need to know how they work.
Failing to build a team
You may choose to keep your business small and run it as a lifestyle business, effectively providing an income for you. You may also want to grow your business and to do this, you are going to need to build a team. Employing people is a big step because it brings added cost and added responsibilities, not to mentioned added risk. You need to make sure that candidates buy into your vision and match you and your company values and culture. A disruptive hire early on in your business can have dire consequences.
Taking unnecessary risks
A common perception is the entrepreneurs take more risks than other people. While at face value this might appear to be true – what can be riskier than leaving paid employment to start your own business? – it’s not. There are of course risks involved in starting and running your own business and good entrepreneurs assess and manage risk well. They can identify risk, understand it, decide if it’s worth proceeding, and build mitigation plans.
As an entrepreneur and business owner, you’ll face these risks and many more. Being aware of the main ones will give you a running start.
Written by: Günter Richter