Starting up: common mistakes and how to avoid them

Overview

Businesses are most vulnerable to failure during the early years of trading, with 20% of new businesses folding within their first year and 50% within their first 3 years. These figures shouldn’t scare you off, but they should prepare you for some of the challenges entrepreneurs face when starting a business. With hard work and an awareness of the issues, your new business can be a great success.

Poor or inadequate research

Research and planning are vital to ensure that your business idea is viable and that your pricing is both competitive in your market place and provides an adequate return.

Lack of in-depth market research

It’s easy to get carried away with a business idea and set up a business without testing its viability. Accurate market research data will ensure that you understand your market and help create robust, realistic forecasts.

It’s important to consider what your audience or customer needs are and to use market research to test them. Feedback can be factored into the products or services you are designing.

Sharing your business ideas with people you trust means that you will benefit from objective feedback. Note down any good ideas you get from brainstorming and use them when deciding how to take your business forward.

Gathering potential customers’ feedback on plans or prototypes can help you discover whether your product offers a solution to a problem or something new that they would purchase. Positive feedback should support and inform the decision you make and could help you attract investment funding. On the other hand, negative feedback provides you with the opportunity to rethink your plans and could help you make better use of your time and money on more profitable products.

If you want to keep your ideas confidential, consider using a non-disclosure agreement, also known as a confidentiality agreement. This is a legal contract between you and another party not to disclose information you have shared for a specific purpose.

Weak financial planning

A lack of funding or contingency planning, or a reluctance to seek professional advice can bring major problems.

Lack of funding

Having sufficient capital is essential for the survival and prosperity of your business, and is a primary indicator of your business’ health. It is important to create a business plan to attract and secure the right type and amount of funding. A business plan can:

      • be used as a tool to structure the financial side of your business and can be updated and changed as your business grows
      • keep your expectations grounded for what the business can deliver

Lack of a contingency plan

Situations beyond your control that may impact on your business and cashflow include interest rate rises, transport strikes and political instability. While your business can survive periods where there are no sales or profits, it cannot survive without cash. Building up cash reserves will ensure that you can continue to trade even in difficult times.

A reluctance to seek professional advice

Failing to seek professional advice will make any financial troubles worse. Consulting an accountant or financial adviser can help you ensure you borrow and manage money cost-effectively.

Setting sights too high

It is important to make realistic forecasts about your business’ potential. During the start-up phase, it can be easy to make over-optimistic forecasts, but there can be serious consequences to unrealistic projections.

Over-optimistic forecasts about market size

Inaccurate forecasting of market size is a common mistake when starting up. Cash levels can be quickly depleted if you recruit too many people, buy unnecessary equipment or spend too much on business premises. Effective cashflow and income forecasting can help you avoid this.

Inaccurate forecasting is often linked to poor market research, so it is essential to get your research right.

Focusing on sales volume or size not profit

A common mistake for new businesses is to focus too much on growing the sales volume or size rather than profit.

Overtrading can occur during the rapid expansion of a new business when it takes on more orders than can be supported by its working capital or net current assets. This can have serious repercussions.

Diversifying too soon

You may want to tap into a new market or geographical area, but diversifying too quickly can actually increase your business risks during the vulnerable start-up stage.

Poor planning

Poor planning will increase your chances of making business mistakes and will reduce the probability of achieving your goals.

Drawing up a realistic business plan is essential. A business plan will help to secure external funding, pre-empt problems and measure how well your business is doing.

Writing a marketing plan will also ensure that you make decisions about your target customers and your marketing objectives and will help you set goals to address these.

Taking your eye off the competition

During the busy start-up phase it can be easy to forget to set aside enough time to monitor the competition. However, it’s essential that you are ready to respond to competitors in your market place and to new developments.

Successfully monitoring your rivals will allow you to see what competition or threats to your business exist in your market place.

Competition is not just another business that might take money away from you. It can be other products or services that are being developed which you could sell or license before somebody else does.

You can get clues to the existence of competitors from:

      • searching on the web for similar products or services
      • advertising
      • press reports
      • exhibitions and trade fairs
      • approaches reported by your customers
      • flyers and marketing literature that have been sent to you
      • planning applications and building work in progress

Feed any useful information into your marketing plan.

Poor supplier and customer controls

Common mistakes for new businesses include setting up unsatisfactory credit arrangements and not taking due care when choosing suppliers.

Setting up poor supplier contracts

Choosing the right supplier can be vital to the success of your business because you rely on your suppliers to provide you with the goods and services your business needs to operate. Getting the best deals can have a significant effect on your business’ profits.

Setting up poor credit arrangements

If you’re dealing with a potential new customer, it can be tempting to offer credit without carrying out checks but this can leave your business exposed to delayed or non-payment. You may find that you can’t pay your suppliers or bank on time. In turn, they may withdraw their supplies or funds, putting your business at risk.

To ensure a successful strategy for customer payments, you may want to:

      • carry out credit checks on new and existing customers
      • check bank references, trade references and online credit-ratings, from a credit-reference agency
      • ensure that your customer is aware of your credit terms (eg they must pay within 30 days) and that the payment terms for your debtors are longer than the terms you offer your customers
      • motivate customers to make early payments by offering discounts
      • investigate legally enforceable ways of encouraging prompt payment

Hiring the wrong people

A large part of your new business’ success will be determined by the quality of the people you recruit.

How you choose to approach employing people will depend on your business needs, eg whether the work is constant, how long it will last and the number of hours available.

It may be useful for you to explore all the different options for employing people.

Poor stock and asset management

Poor stock control and over-investment in fixed assets can mean your capital is tied up unnecessarily.

Poor stock control

Efficient stock control (inventory) will mean you have the right amount of stock in the right place at the right time. It ensures that capital is not tied up unnecessarily, and protects production when there are problems with the supply chain.

You need to put systems in place to keep close track of stock levels and values. Taking control will allow you to free up cash, while also having the right amount of stock on hand.

There are a number of ways you can approach stock control. You can:

      • re-order when stock reaches a minimum level
      • carry out regular reviews of stock
      • use just in time(JIT) delivery to avoid excessive stock build up

Over-investing in fixed assets

Over-investment in fixed assets, such as office furniture or computer equipment, can be a problem. Acquiring fixed assets outright gives you ownership straightaway, but you have to pay for the full cost upfront, which drains cash.

The alternatives include:

      • Leasing assets allows you to spread payments in regular instalments over a fixed period, thus freeing up more cash. You may be able to upgrade equipment without having to buy more up-to-date models.
      • Hire purchase – you own the asset at the end of the payment process. This is not the case with leasing.
      • Buying second hand – for office furniture, fittings, etc.