You’ve probably heard a lot of scary statistics about the number of small businesses that survive their first few years. But this shouldn’t discourage you. Many small businesses fail for the same reasons, and many of them can be avoided with the right research, planning, and advice.
Below we explore this further, explaining why many small businesses fail and offering solutions on how you can ensure your business passes the survival stage.
What is the Survival Stage?
There are five stages of small business growth. These are; existence, survival, success, take-off and resource maturity. We’re going to focus on the survival stage.
In this stage, your business now exists as a workable entity. It has its products or services, key customers have been identified and it has the capital to operate.
However, now comes the important part; surviving.
The business may be very simple, with minimal employees and management. And the owner may be somewhat synonymous with the business, carrying out all major decisions and leg-work. Their goal at this stage is still just survival, meaning formal planning is mostly focused on cash forecasting.
From the first stage of small business, the problem evolves from merely ‘existing’ to finding answers for these four questions:
- What is the relationship between revenues and expenses?
- Can you generate enough cash to break even?
- Do you have the cash to cover the costs of repair or replacement of your main capital assets if they wear out?
- Can you generate the cash flow to stay in business in the future by financing growth to earn a sufficient return?
Why Do So Many Small Businesses Fail?
According to the Australian Bureau of Statistics, more than 60% of small businesses cease operating within the first three years. And this daunting figure could influence many decisions about whether to start a new venture.
A report from the Australian Securities and Investment Commission found that in the 2014-2015 financial year, the top causes of small business failures were as follows:
- Inadequate cash flow or high cash use (44%)
- Poor strategic management of business (42%)
- Trading losses (34%)
However, these problems often have a similar root cause. As that report suggests, lack of capital is the biggest reason for failure. Businesses need enough working capital to pay their numerous expenses (e.g. overheads, employees, suppliers) while also keeping an eye on the future. If there isn’t enough capital left for slow periods or for necessary repairs or growth, businesses will struggle to succeed.
Another reason is that a lot of failed businesses start with an idea or model that was never going to work. Without a clear understanding of the value and demand for your product or service in the marketplace, the survival stage is almost always a step too far.
Further, a lot of small businesses don’t have the expertise to function by themselves. Having an “entrepreneurial spirit” isn’t enough when there’s a myriad of social and economic forces which will influence the marketplace. Training and the right advice is an absolute necessity.
What Can You Do to Survive?
There are five main pieces of advice which will help your business successfully navigate the survival stage. They are outlined below.
- Do your research – It doesn’t matter how revolutionary you think your business is, without doing your research you won’t have any idea of the demand in the marketplace. Look for other competitors, what they’re offering and how you can do it better.
- Get the best advice – Not all information online is reliable. The best advice comes from someone who’s had years of experience working on a wide range of business problems in many different industries. Contact a trusted business advisor to sit down and discuss the best ways to move forward and position your business for success long into the future.
- Create a business plan – A business plan hones your vision for the future. It’ll make sure you’re aware of your specific goals and their timeframes, as well as the obstacles you need to overcome to get there.
- Keep your expenses low – As we’ve seen, costs are the pitfall of so many small businesses. Keep them as low as possible and only expand and hire more staff when ready.
- Reinvest back into your business – As often as possible, you should be putting your profits straight back into your business, whether it be through marketing, research and development, or another source. It’ll ensure you’re always improving and growing your business into the future.
Too many small businesses fail to make it past the survival stage. Ensure you plan appropriately and access the best possible advice and your business should be in safe hands.