Chapter 15: Assessing business start-ups

 

 

Why Start-ups can be risky and why many fail?

 

1/6 of new products succeed in the market place

Failure rate = 80%

 

Reasons for business failure=

• Poor cash flow management
• Lack of effective market research
• Lack of effective planning
• Lack of skills needed to run a business and lack of business training
• Problems in coordinating all the different aspects of the business
• Failure to turn what looks like a good idea into a profitable business
• Lack of finance to fund the business
• The actions of bigger competitors
• Difficulties in developing a solid customer base
• Difficulties in acquiring affordable premises
• Unexpected changes in demand for the product/service
• Unexpected changes in costs
• Delays and unavailability of supplies

Financial Difficulties: Raising Finance

The main issues are:

• It can be difficult to raise sufficient finance to get started. A new business has no 'track record', so lenders see it as much more of a risk than an established business.
• This 'risk' leads to higher interest rates being charged in order to balance the risk to the lender.
• Banks want collateral or security. This means owners putting up personal guarantees for any loans, offering their own assets (such as their homes or business premises). In effect, the owner is taking the risk rather than the lender.

These financial issues can:

- Slow growth of the business

- Threaten the survival of the business

- Affect the productivity of the business

- Affect the ability of the business to invest (e.g. in new machinery or premises)

 

Financial Difficulties: Cash Flow

• Profitable firms --> Impossible to keep trading --> Unable to meet current debts
• Cash tied up in stock that cannot be used immediately to pay bills
• Creditors slow to pay for its debts
• Business start-ups make a cash-flow forecast as part of the business plan --> Shows expected variation in working capital needed over time --> Indicate when overdraft facilities required to cover shortfalls.

Competition and the difficulties of building a customer base

 

The success of a business start-up will be determined by its ability to attract and retain customers. To do this, it will have to offer something more than any of its competitors and to gain customer loyalty.

 

Factors to consider when trying to encourage customer loyalty:

• Providing customers with service that is efficient and meets their expectations
• Providing a good after-sales service and dealing effectively and positively with customer complaints.
• Understanding customers' buying habits and ensuring that stock and staff availability are appropriate
• Ensuring that contact between customers and staff is always friendly and efficient.