Top 10 fatal start-up mistakes
This article first appeared June 22, 2012.
With warnings of a second global financial crisis and consumers at home who refuse to part with their cash, it may seem like hard times are ahead for Australian small businesses.
Sadly, it appears that SMEs haven’t exactly had much respite since the first GFC. Recent figures released by accountancy firm Taylor Woodings show that company collapses are up 13.6% on the same point last year.
These figures, and latest turmoil in Europe, shouldn’t cause start-ups to panic – indeed, there are very positive factors such as the relative strength of the Australian economy and the ease of starting up – but it is perhaps more important than ever to avoid making potentially business-wrecking mistakes.
We’ve spoken to the experts to compile the 10 mistakes your business can’t afford to make in the current climate. Don’t say we didn’t warn you.
Click through the tabs below for each top tip:
1. Late payment complacency
You don’t have to be a rocket scientist, or even a rocket-selling entrepreneur, to realise that the rise in insolvencies is partially linked to the growing problem of late payment.
According to Dun & Bradstreet, two thirds of businesses take longer than the standard 30 day-period to settle their bills. The national average payment time on invoices has risen to 53.4 days and it doesn’t look like improving any time soon.
If you are owed money, don’t be afraid to chase it. Set clear payment terms and hit the phones as soon as they are breached. Keep the calls going until you get paid. Good customers won’t desert your business if you demand to be paid – only the cashflow-destroying ones.
If you are the debtor, try to negotiate favourable terms before it gets ugly. But also realise your place in the supply chain – it’s likely that your tardiness will impact other small businesses.
2. Falling foul of the ATO
One of the key reasons for the rise in insolvencies in the 2011 financial year was a crackdown by the Australian Tax Office on wayward small businesses.
Whereas sloppy tax dealings and debts were, to an extent, overlooked during the global financial downturn, the ATO has now clearly set its sights on strict enforcement and certain businesses are feeling the pinch.
The ATO has unveiled a new tool that it will use to identify under-reported income, phoenix activity and contractors that register as businesses and fail to pay their tax bills.
The message is clear – do not run an unsustainable debt, be certain of your tax obligations and comply with them. The penalty for not doing so could sink your business.
3. Currency exposure
The strong Australian dollar is another reason for the rise in solvencies, according to Luke Targett, a partner at accountancy firm PKF, who says directors are beginning to realise it is often better to place a company straight into voluntary administration.
“If a business can’t be saved, it can be cheaper and quicker,” he says.
“Retail, exports, manufacturing – they’re all plagued by the same problem, which is not being competitive in terms of the strong Aussie dollar.”
There is very little you can do to influence the strength of the Australian dollar, but you can ensure that your business isn’t overly-exposed to it.
Don’t rely too heavily on one export market, diversify your offering if needs be and make small but potentially sales-boosting changes such as offering your products in local currencies.
4. Piling on the debt
Many businesses fall over because they take on a huge burden of debt early on and then struggle to make ends meet.
Tying yourself into hefty repayments when you haven’t properly tested the market viability of your product or service is risky. If your business grows, your cost base will grow too, putting you under financial strain.
Keep everything as lean as possible in the early days. Cut out unnecessary cost and plough everything back into the business, rather than servicing debts.
Marc Peskett, partner at business advisory firm MPR Partners, says: “Stick to your bank if possible. But if you haven’t got property to borrow against, you will struggle, so look for the three ‘fs’ – family, friends and fools.”
“Better still, bootstrap your business. Start off small, lean and mean. Once you’ve validated your business model you can look for funding, but not before then.”
5. No business definition
Start-ups can go horribly off track by failing to keep to the core principles that form the foundation of any principle.
At any one time, you should be able to clearly explain what your business is, what problem it solves the market it is aimed at and the edge it has over the competition.
Without a core ethos, your business will lurch from one mistake to the next, wasting money on customers that will never want to use you and driving away the ones that do.
A sound business plan is the best way to keep your business anchored. It shouldn’t be a static document, but it will provide a reliable set of values. Just make sure you steer clear of the 10 most common business plan mistakes.
6. Competing on price
There is a reason large chains can offer big discounts to consumers – they have huge buying power and deep relationships with suppliers.
As a start-up, you have neither. Trying to compete on price is one of the fundamental, but common, mistakes made by new businesses.
Realising your error and then increasing prices is often futile. Pitch your business’ proposition and prices at a respectable level – not only will it help your bottom line it will also build your brand in the long-term.
7. Not anticipating a cashflow crash
As business advisor Greg Hayes puts it: “As entrepreneurs, we are naturally optimistic and see the upside in everything. But you need to take a very cold shower before you predict your cashflow.”
Almost every business experiences a cashflow downturn at some point. Your company may be seasonal by nature or depend on strong consumer spending around key dates such as Christmas or Easter. A major client may leave or a natural disaster may wipe out your stock.
The crucial question is, what will you do when your cashflow crunch happens? Do you plan ahead, build up a buffer and have safeguards in case the worst happens? Or do you expect everything to sail along as smoothly as before?
8. Failing to identify your customer
Not only should you clearly identify who your customer is before you launch, you need to keep pace with them once your business is up and running.
With consumer confidence in the doldrums, prising money out your customers is harder than ever before. You must innately understand what they like, what they don’t and how you can make life easier for them.
Fortunately, the modern entrepreneur is armed with plenty of tools to ascertain the whims of consumers. Utilise Facebook and Twitter for instant feedback, as well as other online tools such as Survey Monkey.
9. Not grasping the potential of online
When it comes to the internet, Australian businesses continue to lag behind the rest of the world.
Recent MYOB research found that 57% of Aussie businesses don’t have an online presence with 47% saying that they didn’t feel threatened by the rise of eCommerce.
It’s clear that a significant shift still needs to take place in the mindset of Australian business owners. The days when you are merely competing with the rival down the road from you are long gone.
Consumers are increasingly using the internet as a first port of call when looking for products or services. If you aren’t online, you are simply invisible to a large chunk of your potential customer base. Not only will they go to your local competition, they also have their pick of the global marketplace.
Web development costs may seem a bit steep, but there are cheap, off-the-shelf options to turn to, as well as a range of cloud-based tools that will help you meet your customers’ needs. Don’t get left behind, or you could find yourself obsolete.
10. Not staying the course
Starting a business is tough. Money is tight, the hours long and the rewards delayed. Large competitors will try to crush you and you will have to grapple with an avalanche of unexpected regulation and problems.
It may, at times, seem like an impossible task, but just about every successful entrepreneur has a “near death” story about their early days in business. Often, sheer guts and determination will see you through a rough patch. Be prepared to endure a rough ride and there’s a good chance you’ll come through the other side.