4 Reasons Start-Up Businesses Fail

4 Reasons Start-Up Businesses Fail

Steps to Starting a Business

The Crucial Steps to Starting a Business to Avoid Failure

As a start-up or small business owner, you’re familiar with the steps to starting a business. But, are you aware of the reasons many start-ups fail? It is often said “before you succeed, sometimes you must fail.” While true, the key is to prevent the failures in your business from cumulatively shutting it down. Let’s examine four reasons leading to the failure of start-up businesses.

Inability to Connect your Product/Service to Market Needs

As a business founder, you often believe you have developed products or services that are superior to those available in the marketplace. Sometimes you spend a great deal of time and money developing your ideas before adequately testing or understanding what the demand for your product or service will be.

Focusing the development of your product/service on the unmet needs will differentiate you from your competition and go a long way to a successful launch of your business.

Poor Allocation of Resources

Planning your start-up from concept through implementation and subsequent scaling is one of the critical steps to starting a business and crucial for the long-term success of the company. It is an iterative process that requires insight to the various processes that drive an idea to market. You must clearly define the milestones in each phase of the process to ensure you do not burn through cash or waste other limited resources.

For example, when you are in the early stages of developing your product, you want to be careful about spending in other areas until you have developed the product to the point where it is meeting the market need. However, as you determine the product is close to finalization, you must ensure proper timing of hiring in your sales, marketing and operations teams along with other infrastructure support to get your product to market.

Overcome the Complexities of Growing Your Business

Not Hiring the Proper Team

As the business scales, the founder will have to relinquish control of various functions within the organization to an experienced management and support team. Proper planning needs to be in place around the resources needed to execute at each stage of development and the timing of bringing these people on board. In order to attract and retain the best people, you must budget an appropriate compensation package of salary and benefits and identify the best resources who share the same passion for the purpose of your business as you do.

Above all else, you must be viewed as a charismatic leader with the ability to lead your team to be successful. Remember, as you go through the implementation process, you will inevitably encounter changes in ideas, products and markets. Throughout this process, the team you select will be the glue that holds it all together. Make sure you have a homogenous group whereby each member’s strengths and weaknesses are complementary.

Excessive Cash Burn or Lack of Funding

Many start-up companies fail because they run out of cash. This can happen at various stages of their development, even once they have begun generating revenue. Every successful start-up founder knows “cash is king.” You must plan and model the funding requirements to manage each stage of the process, from concept, through implementation, to scaling the business.

Excessive cash burn, and the lack of recognizing it in a timely fashion, will increase your chances of failing. Careful attention must be exercised to avoid careless spending or making investments with no controls over the return on your investment.

The most basic tool that will prevent this is a cash forecast, which is the most important tool to have in managing your business. Without it, by the time you determine you are running out of cash, it’s too late. The timeline to raise additional capital is at least 6 months before you anticipate needing the cash.

You must take a long-term view in raising capital for your business by clearly defining the cash requirements for each phase of your development. Financial statements should be developed (balance sheet, income statement and cash flow statement) so the sources of your capital can clearly see how the funds being raised will be applied and that any debt incurred will be repaid.

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Steve Lash
Steve Lash
Steve Lash is a founding partner with BeaconCFO Plus who has a passion for developing successful businesses from start-ups to mature companies. Drawing on his financial and operational expertise he’s delivered results by emphasizing proven strategies and solutions that build profitable enterprises.
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