The first fundamental steps towards getting a business off the ground are fairly well defined. They include choosing a name, incorporating a legal entity, raising capital, developing a product or service, and negotiating key partnerships.
All of this requires cash and time and effort, something that is underestimated and not planned thoroughly, which is why it’s such a tragedy that the failure rate among start-ups still remains to this day at 20% in the first year and a further 40% of new businesses failing within the first 5 years.
A short and painful existence may be practically inevitable in some cases, but there are many instances where the avoidance of common errors could make all the difference.
Below are three mistakes that we have seen and encountered most frequently.
Sell something nobody wants
This is perhaps the biggest problem that any business faces when developing a product or service. Sounds common sense but it really is a case of supply and demand. You may have a cracking idea, innovative new product but it is as simple as if there is not a market for your product/service, people will simply not buy!
There is that old saying ‘’you don’t know what you don’t know’’. This is where market research is vital. And it’s vital to recognise this, because the alternative mindset – which is to assume the existence of a ready-made market – can lead to harsh and insurmountable realities.
The most harsh reality could be that you are left with a product that is difficult – if not impossible – to sell.
This is why it is essential to acknowledge inherent uncertainty and to take an incremental approach to strategic sales. Simply put: the product graveyard is full of “better mousetraps” that no-one ever bought. Not because they weren’t a good product, just it wasn’t communicated well that this product was better than the competition. After all a mouse trap is a mouse trap.
Get your price right
Having too low of a price can be a mistake that most often limits the growth of early-stage businesses that are already active in the marketplace. In many cases it affects companies that are also already profitable.
It usually occurs when a management team is afflicted by some form of cognitive bias – for example, an entrenched lack of confidence in a value proposition or an unwavering belief that a higher price will dramatically constrain sales.
A business that falls into this trap is unlikely to generate the cash margin that it requires or deserves, as a result of which it won’t be able to reinvest, There is a fantastic saying you need to ‘sell to serve’ attracting larger profits means you have more money to invest back in the business and make improvements, further develop your product or service offering and ultimately giving your customers more!.
Equally if you price your price too high, you may find that people are not willing to buy as many units as you may require and therefore you could end up with depleted cashflow.
Over-executing before the point of scalability
Businesses that make this mistake run out of cash. We use the term ‘overtrading’ in our profession. This is generally down to businesses not appreciating the working capital implications and requirements of their own business, more often because they don’t understand how to expand a cost base at a speed that reflects sales growth.
For example imagine that a business sells a product to a customer but has to wait 90 days to get paid. That’s the equivalent of a three-month loan; and if sales double in the following year then the size of this “loan” also doubles – meaning the amount of tied-up cash doubles.
This is one reason why even profitable companies go bankrupt. They build a “burn rate” that’s unsustainable, allowing early success to blind them to the ramping up of overheads, such as wages, utilities, premises costs etc…. And it’s tough to raise more capital in the current economic climate. If sales are lagging behind costs (so you receive your sales money on 90 days after sale but you pay your costs within 30 days) you need to fund the loan that you effectively provided your customers to continue paying your own bills. Money can quickly run out! Always remember cashflow is king in any business!
So scaling is undoubtedly a tricky “chicken and egg” affair. The key is to ensure that a business faces as few “unknowns” as possible and can therefore produce a balanced and properly funded growth curve. If all the major questions have been answered then it needn’t be a matter of additional inventive steps or market discovery: ideally, it’s purely a matter of resources and money – something that the investor market should be ready and willing to supply.
Speak to your accountant
Speaking to your accountant more can really help you reduce your tax bills. By speaking to your accountant when you are making a business decision to either start a business, buy an asset, move premises, take on a member or staff for example, expand/scale your business may be beneficial. We will ask a host of questions to see if you have covered many items.. We can get you thinking about things you may not have even thought about.
Speaking to your accountant will guarantee to add value to your business.