There is always an element of risk when starting a new business. Inexperience immediately comes to mind as a big factor in failed new business ventures, but beyond the obvious, there are some processes and issues that simply need to be checked and re-checked, and over-confidence can be just as damaging as green inexperience. When an entrepreneur is blinded by their potential rewards, they may fail to assess the potential causes for new venture failure, and to this end knowledge and preparation are the best preventative medicine.
The demands on management style differ in the various stages of business expansion. The very same traits that lead to a successful start-up could undermine future growth. A company needs a clear leader. That leader must be able to adequately assess the current position of the business, and have a clear concept of what direction the business needs to go in. Everyone in the business structure can function optimally if there are clear, formal structures in place that are flexible enough to handle a wide array of issues. Managers also need to have a good handle on delegating authority while still maintaining a line of accountability that doesn’t lend itself to finger pointing and blame-laying. Inexperience can lead to poor decision-making. A classic example is the family business; friends and family can start joint business ventures where no clear leader has been established, where no single individual is ultimately responsible for success or failure, and the minutia of daily decisions can be argued over ad nauseum.
Financially, entrepreneurs should always, in a “Murphy’s Law” sense, prepare for the worst. Insufficient start-up capital is the result of idealism. The margin of error is very narrow in new business ventures. Three critical assumptions drive cash flow projection: product development time, sales, and gross margin – and being overly optimistic in projections of any of these elements could potentially be a huge obstacle. Always err on the side of caution, and research industry norms, in trade journals or online; this can be very beneficial in estimating realistic cash flow. Underestimating start-up capital can create a domino effect that will sound the death knell for any emerging business, leading to insufficient funds, a high debt load, and over reliance on trade credit (receivables). Failure to control inventory leads to shortages and stock outs, and psychologically can undermine consumer confidence, creating a decline in repeat business.
Inadequate marketing strategy and assessment are not necessarily due to a lack of foresight; perhaps, marketing failures could be attributed to a lack of “hindsight” – not enough research. This can lead to misjudging the size or overall growth rate of a specific market, underestimating competitors, or overoptimistic estimates of potential market penetration. There can be unexpected delays in securing distribution channels, or lack of promotion leading to low customer awareness. If business is already a bit slow, an economic downturn could be disastrous. The solutions are quite straightforward but do require homework – exhaustive research and attention to marketing strategy will always pay off in the long run.
Defining a new venture’s offering can be exciting, like fantasizing, but be prepared to be realistic, work hard, and make a lot of sacrifices. For example, not every business can offer the absolute best quality at the absolute lowest price. The bottom line is that profitability will always be a primary concern, especially if maintaining quality standards is an issue. A product may be innovative, but there should always be a team member in the start-up group who has some experience with commercializing a product or service; nothing sells itself. And if there is no element of innovation, don’t fall prey to “me-too” syndrome and try to sell a popular product with your special spin. Analyze the market, do the research, and understand customer needs.
Mismanagement of operations can undermine a new venture’s potential success. Underinvestment in equipment is almost as bad as over investing in fixed assets. And no matter how beneficial the product or service, a bad location is just a bad location – this is especially true for retailers. Adequately assess overhead relative to the scale of operations and properly utilize business capacity: understand your own needs as much as you seek to understand the market you are entering. Understand the relation of operational costs to productivity – are you making a bottom line profit that is acceptable according to your clearly defined business plan?
The goal is to coordinate into a synergistic whole. The plan, the people, the motivation, the creativity, and the productivity are all intimately tied together. A successful business is built on a solid foundation of market research, self-assessment on the part of the business owner, motivational, communicative and productive management strategies, and strong but flexible financial and operations controls.
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