More than half a million Australians are involved in the early stages of setting up a start-up business and it is a well-known fact that most small businesses fail within the first few years. So what are they doing wrong?
At MAS Accountants we have a lot of businesses come to us in the early stages and we are able to spot the red flags. Here are my top five mistakes to avoid when starting a new business.
1. Letting emotion and egos rule
Most small businesses are built from the ground up, so of course it is natural to grow emotionally attached. However, this is where so many people go wrong. Being emotionally invested only sets you up for failure. It clouds your judgment and stops you from seeing clearly.
These emotional investments may include the ego factor. Egos are bad for business. Usually, when high stakes are at play the egos come out. This happens more often than not in business. However, the ego can shroud judgment and can cause even the most sensible people to make stupid business decisions.
When clients come in with a business or business idea that they are too personally attached to and are set in their ways, we have to give them the “tough love” speech: take a step back, assess it as business and find the best ways to move forward.
2. Being undercapitalised
Funding is the key to creating a business. Having the right amount of capital can turn the business from non-existent to booming, while a lack of funding is a common mistake most start-ups make.
Either the business was not able to get the bank loan approved, or they financed the business with short-term capital rather than permanent capital or simply made business purchases that exceeded their means.
It is important to manage cash flow and the best way to handle this is to make sure you have both a financial plan and a business plan and that you are prepared.
3. Leaving homework undone
Some small businesses jump into the sector without giving it a second thought. With the entrepreneurial boom there are plenty of people coming up with new business ideas. However, many of them do not have a legitimate plan in place to secure the future of the business.
Most businesses are making mistakes because they are not thinking things through. Proper research includes asking questions such as, ‘How much rent am I paying?’ ‘Am I getting ripped off?’ or ‘Can I get a better deal?’
I cannot stress how important it is to have a strong foundation and blueprint before you even think of starting a business. You need to plan for the financing and the business structure, and you need a contingency plan for the unexpected hiccups.
4. Seeking investors to fast-track growth
Most start-ups want to grow quickly and seek investors to solve this problem. However, this doesn’t always work in the business’s favour. Finding an investor for rapid business growth is not ideal and it is much better to grow the business organically.
Growing it naturally is more sustainable because you have invested the time to create the right foundations and systems to ensure the business’s long-term health. When mismanaged, fast growth can cause the company to crash.
Also, investors won’t be satisfied until they earn their cash back. This means they may push for rapid growth which won’t always match up with your business plan.
5. Jumping in with friends
Partnerships with friends can seem like a fantastic idea when sharing a drink on a Friday night. However, reality tends to be less than amicable. Partnerships are tricky, especially those with friends, because they add not only an extra element to the business but an emotional element as well.
Before delving into a partnership, it is best to evaluate whether the other party has a different approach to the growth of the business, a different vision or different values. Partnerships work when all parties complement each other’s strengths. Remember that most business partnerships do not survive so make sure to think it through before going ahead.
By John Corias