The figures quoted for small business failures vary quite a bit, however regardless of this there are a significant number of small businesses failing within the first 3 years of setting up. While some of these failures can be put down to factors that are out of the control of the small business owner, like changes in government regulation and economic downturns, there are still a lot of small business failures that could have been avoided. Here are 5 factors that we believe are critical when setting up and operating your small business, if you miss these 5 then we believe that you are potentially putting your business at risk.
1) Budgeting and Forecasting Before you start your small business it is critical that you know what you are going to bin the industry for some time then you will probably know what a bit about how big the market is and what the potential is for a new entrant. If you haven't been working in the industry then you really need to do your homework in terms of who the competitors are, what the size of the market is and what potential there is for a new entrant. Don't just do all of your work through Google. Get out and talk to people who would be potential customers and go out and do a bit of mystery shopping with the companies that are going to be your competitors. Remember, the more information that you have before setting up your small business the better prepared you will be when something new comes out of the blue.
Once you have your background information you need to put together a detailed budget. You should try to make the budget as detailed as possible and you should make realistic assumptions. While everyone wants their small business to be a terrific success it is important that you take a balanced view when putting together your budget. When building your budget you should try to keep it to a P&L type format. You can customise that format to suit your specific business but you should still try to ensure that it flows logically between P&L categories. Also, make sure that you identify every possible expense that you are likely to be up for.ie, you should make sure that your budget includes all potential taxes and government charges plus any potential employee costs that you may have to pay. When estimating the sales for your new business make sure you put plenty of time into working out the logic of how these sales will be derived and any sales funnel that may impact the timing of these sales.
Once you have a detailed budget in place don't simply put it in the drawer and forget about it. You need to keep your budget updated on a regular basis to ensure that all of your predictions and assumptions make sense. By pro-actively managing your forecasts you will be able to see issues arising and hopefully act on those issues before they become too serious.
2) Cash Flow Management and Funding Cash flow management is a big one with small businesses. The old adage that you need to spend money to make money is quite true however you need to be spending money on the right things that will give you an ROI. As a small business owner you need to get a really good handle on all of your cash inflows and cash outflows. You also need to understand the timing of these inflows and outflows. Customers will pay in really different ways. If you have government or big business customers then they may not pay until 90 days after invoice date. Other customers may pay immediately whilst others again may not pay until a specific date in the next month. Similarly, with your creditors you will need to work out how much credit they are happy to give you and how quickly they will need to be paid. With some creditors like rent and the ATO you will find that they are extremely strict with their requirements while other suppliers may be a little more flexible.
Funding your small business is another critical area. Many small businesses underestimate their working capital requirements when they start out and end up needing to find additional funding further down the line. When putting together your cash flow forecast it pays to go into as much detail as you can. Spend some time working out the timing of your cash receipts and try to work out the relationship between your sales and any stock levels that you will need to hold. If you are going to fund your business externally via a bank or a financial institution then you will likely need to put together a business plan and a detailed cash flow forecast before the financial institution gives you any money. If you don't think that you have the requisite skills to create this cash flow forecast then we would strongly advise that you find yourself a good local CPA or CA to help with the process. Whilst it may cost you a little bit of cash upfront to get a good accountant involved it will likely benefit you down the line when you need to get additional funding.
Something to keep in mind when funding your small business is that you should try not to be too reliant on credit card debt. Whilst it can be quite tempting to use your credit card as a temporary source of cash you need to try to repay those credit card debts as soon as possible otherwise the interest rates charged will potentially cripple your small business.
3) Staff Once your small business is up and running you will need someone to do all of the work. With the vast majority of small businesses, initially that is the owner. Whilst it can be a good feeling to be a jack of all trades and to have your fingers in every pie related to your business it is probably not the best use of your time or your funds to try to do everything yourself. If you are the one going out and doing the deals for the business and bringing in the revenue then it probably doesn't make sense for you to be answering the phones or cleaning out the bins.
The problem is, in today's business environment it can be extremely expensive to employ staff. Also, given the variability of small businesses and start-ups you may have a need for staff this week but next week things might go a bit quiet. One solution to this staffing problem is to look out outsourcing some of your work to other businesses or individuals. Why not make use of an external bookkeeping service to look after your accounts and a telephone answering service to answer your incoming telephone calls and an external marketing agency to take care of your Adwords or SEO requirements. The great thing about outsourcing some of your tasks to external businesses is that you generally only need to pay them for the work that they have completed. If things are slow due to a downturn in business then your outgoings will also be low.
4) Reporting If you want your small business to be a success then you need to have your finger on the pulse of that business. These days it is not sufficient to simply look at your annual accounts to try to work out where you are heading. With the technology that is available today you should be able to set things up so that you can always be in touch with where your business is heading.
All of the popular accounting packages these days will work via the internet and will also support different platforms which means that regardless of where you are or what device you have in your hand you should be able to see where your small business is heading. If your small business is an online business then you should keep a close eye on your analytics data and really get a good idea of what all of the KPI's mean. In the online world you will need to react very quickly to changes in your business environment. If all of a sudden your online traffic drops then you need to be aware of it and addressing it within hours not weeks.
5) Offices It used to be that when you decided to launch a new small business the first thing that you did was to go out and have a look at some suitable office or warehouse space. The problem with this is that it is really difficult in those early days to predict just how much space you are going to need for your staff and how much you will need for staff etc. On the flip side to this, when signing up for commercial space you are usually required to lock in for a minimum of 2 years. That first 2 years can be a critical time in the life of a small business and if you are tying up all of your capital in securing unsuitable business premises then you may end up sabotaging your small business before it even gets going.
Why not consider making use of temporary space for your business or potentially even virtual space. While in the short term it may cost you a little bit more for a serviced office you could buy a bit of time to work out exactly what the requirements will be for your new business. If you are looking for a really cost effective option then it may be worth looking at getting a virtual office when you start out. A virtual office gives you many of the benefits of a prestige CBD address without having to outlay all of that cash. With a virtual office you can work from wherever you want while still having your mail delivered to one central point. You can also make use of your prestigious virtual address on your marketing materials, website and business cards. It really is the best of both worlds at a really affordable price.