An Industry Canada study indicates that over 28% of small businesses in Canada fail within the first two years.* It’s an alarming statistic considering, on average, 99,000 new small businesses are started in Canada each year.**
While there are a myriad of reasons new companies go under, here are four common ones:
1) Insufficient working capital
“A significant problem for many companies is having insufficient working capital,” says Alan Haigh, Assistant Vice-President, Business, at BlueShore Financial. “Many new business owners discover too late that they lack the funds to continue to operate.”
Lack of capital can become a problem for a number of reasons, including:
- Poor cash-flow management
Every business owner knows effective cash-flow management is critical, but it can be challenging in practice. There’s often a delay between fulfilling orders and receiving payment. The loss of major clients can impact your revenue stream. But expenses such as salaries, leases and utilities have to be paid while waiting for revenue to come in.
A failure to fully understand your company’s cash-flow situation and effectively manage the risk will create problems. Having adequate access to capital to bridge revenue gaps and building a contingency fund to cover any potential financial crisis is crucial.
- Overestimating your margins
A business with a negative operating margin loses money. This can become an issue for a new business if you underestimate your costs and overestimate revenue. If it costs more to run your business than you can make from selling your product or service, your company will ultimately fail.
When making revenue and expense projections you should include best- and worst-case scenarios and understand your costs intimately. You also need to have a strong pricing strategy in place. Will customers pay what you need to charge to be profitable?
- Overexpansion or expanding too quickly
All business owners want their business to grow; some owners even believe growth is the answer to revenue shortfalls. Unfortunately, growth also comes with its own costs.
Fulfilling larger orders or expanding into new markets often requires more inventory, staff and equipment. How will you pay for these added expenses? Too fast or poorly planned growth can lead to a shortfall in working capital and subsequent financial problems.
2) Poor planning
You’ve likely heard it before: every new business needs a well-thought-out and researched business plan. By building a strong plan, you create the best opportunity for success.
“A business plan is a blueprint for running your company,” Haigh says. “It needs to contain the information and research required to guide your operations.”
Examples include:
- a market analysis and deep understanding of your clients
- information about your organization and management team
- product and/or service details
- a specific and realistic marketing plan
- financial reports and/or realistic financial projections
Writing a business plan also isn’t a one-time event; it needs to be updated yearly or even more frequently if changes dictate. If you don’t continually review, you can miss out on new opportunities for growth or significant changes in your market.
3) Not knowing your market
Having a detailed understanding of your market is another competency critical to new business development. And while it’s part of the planning process above, it warrants separate mention.
You must define your target market and know your potential customers and competition. Your product or service must address an unmet consumer need, and you’ll need a competitive advantage to help you sell.
“Many new businesses fall short in this knowledge. They may have a great product but face low consumer demand or high barriers to enter the market that they weren’t aware of,” says Haigh.
4) Failing to seek expert advice
And lastly, every new business faces challenges, and experience and knowledge can go a long way to helping manage the risks. Unfortunately some business owners fail to seek expert advice from the start.
Establishing a long-term relationship with a team of experts who know your company – a lawyer, a tax specialist and accountant, a business advisor – can help your business succeed.
Sources:
* Industry Canada Key Small Business Statistics August 2013
** Industry Canada Archives, Key Small Business Statistics July 2012
