Every small business needs finance initially, which has been observed as the biggest obstacle while starting the business, and the leading cause of small business failure. Besides gathering funds, the critical aspect to avoid small business failure is to implement productive and financial budgeting strategies that can help your money go a long way. And challenges become more invasive when you are consistently bootstrapping, investing your saving in business for developing it.
Small business failure: what to avoid
So how can you get your money to make more money and avoid small business failure? To do this, you need to steer out of financial mistakes by staying focused on your financial statements because there’s nothing worse than your business losing more money than is required. Today according to small business statistics, 49% of small businesses start their business with a capital of $2000, which is a seemingly shocking feat. But there are effective ways to avoid extra costs, which are mentioned further down:
- Growing for the sake of growth
Every business owner has a myth that the road to success is the growth of sales — as they find it an appropriate solution to all their problems. In fact, dwindling the number of products or product line is typically the best route to drive profits and higher returns. You need to focus on your marginal accounting for better returns to prevent small business failure, so avoid random pricing to all the products as it will directly affect your overhead cost. However, a direct increase in overhead cost can lead your business in great trouble. It should be cut down over the time.
Another factor that contributes to the better growth of the small business is break even accounting. A break-even cost is a stage at which revenue equal costs. Therefore, take a better look at your labor costs, and variable costs.
When the sales volume increases to absorb all variable cost as well as the chunk of the fixed overhead cost, you reach the break-even point. Then the margin of additional sales above the variable costs adds to the profit. Thus, small business accounting can be robust to manage, but once you are above all the factors, you reach your desired goals.
- Inadequate product cost
What happens is small business owners usually become blind when their products hit the top list in the market, and they start launching more new product lines. And here is where the actual trouble begins that leads to small business failure!
It becomes quite challenging for entrepreneurs to price each product, however, if they consider all the overhead expenses as a variable, pricing becomes easy. Therefore, senior managers should better understand the way to interpret their cost accounting efficiently to prevent small business failure.
And it is advisable if one considers shrinking strategy because it is beneficial. If you want to eliminate the complexity of your business then downsizing your firm can be of great help. In this way, you can separately price a group of product line so that you can gain better profits.
- Gearing operation to the income statement-
This is one of the most prominent mistake entrepreneurs make in small business accounting that can spark small business failure. They keep on gearing the activities of the income statement and completely ignoring the balance sheet.
And ignoring your balance sheet can create havoc in your business. Because with inadequate knowledge of cash flow of the business, you cannot stabilize your financial position. Hence, smartly analyze your financial statements to avoid small business failure.
What is included in cash flow?
- Accounts receivable – Streamlining your collection process is of utmost importance to reduce bad business debts. Thus, following-up with your debtors critical to enhancing accounts receivable process.
- Accounts payable – Every business has to purchase raw material, which is usually on debts. So paying your bills on time is highly crucial to reducing your liabilities.
- Inventory management – Having a track of your inventory items so that you won’t suffer from heavy waste products or unable to fulfill customer demand. Keep a hawk eye on your inventory and thoroughly go through the books.
- Fixed Assets – Well, being a business owner, you might have invested in fixed assets that include machinery, land, building, property, etc. Thus, depreciating them every month is vital to get the right value once you sold out these assets.
- Liabilities – Don’t forget about your liabilities! Try to repay your capital as soon as possible, whether you took a loan from bank or relative or using your own saving repaying is the best way to keep yourself stress-free and then focus on other growth factors of the business.
4. Inappropriate management
Another common reason for small business failure is a lack of business acumen on the part of the management team or the business owner. In some cases, the entrepreneur is the only person with a higher education level within a company, especially when it is in its first or second year of operation.
While that owner may have the skills to create and sell a viable product or service, they often lack the attributes of a strong manager and don’t have the time to successfully supervise other employees. Without a dedicated management team, a business owner has greater potential to mismanage certain aspects of the business, whether it’s finance , hiring or marketing.
Smart entrepreneurs outsource activities they don’t do well or have little time to do successfully. A strong management team is one of the first additions a small business needs to continue its operations well into the future. It is important that business owners feel comfortable with the level of understanding each manager has regarding the business’ operations, current and future employees, and products or services.
5. Ineffective business planning
Small businesses often overlook the importance of effective business planning before opening their doors. A solid business plan to avoid small business failure must include, at a minimum:
- A clear description of the business
- Current and future needs of employees and management
- Opportunities and Threats in the Broader Market
- Capital requirements, including projected cash flow and various budgets
marketing initiatives
6. Ignore competition analysis
Entrepreneurs who do not meet the needs of the business through a well thought-out plan before the start of operations are preparing their companies for serious small business failure. Likewise, a company that does not regularly review an initial business plan — or is not prepared to adapt to changes in the market or industry — encounters potentially insurmountable obstacles throughout its lifetime.
To avoid the pitfalls associated with business plans, entrepreneurs must have a solid knowledge of their industry and competition before starting a business. A company’s specific business model and infrastructure must be established long before products or services are offered to customers, and potential revenue streams must be realistically projected well in advance. Creating and maintaining a business plan is critical to running a successful long-term business.
7. Fail to have tight financial control
As we observed, the lack of money is among the main reasons for companies to close their doors. And to avoid this small business failure, it is vital that the business has strict financial control.
One solution is the outsourcing of the company’s financial management. In this way, an experienced team starts to do all the control of accounts payable and receivable, anticipating the necessary and allowing the entrepreneur to have an accurate idea of the financial health of the business.
Bottom line
Being a small business owner streamlining your books at the initial phase is indispensable to stay consistent in the market for a long run and not fall victim to small business failure. Thus, work smart, put your efforts in the right situation and become a real winner!
