9 Challenges Setting Up A Business
Setting up and running a new business can be one of the most rewarding experiences when done well. However, it will challenge you and can be costly, both financially and to your wellbeing. Keeping an eye on the key challenges below will increase your chances of success.
1. Failure to plan
Failure to plan must rank number one here. With all the excitement associated with realising a passion, it can be tempting to jump in at a hundred miles an hour - spending money on marketing, stock, premises, staff etc.
However, without proper planning can mean that your business runs out of cash fast, leading to the collapse of your dreams. UK research found that approximately 25% of small businesses fail in the first year. A staggering 50% of start-ups fail in the first five years primarily due to a lack of business planning and running out of cash.
Spend the time to create a Business and Strategic plan that models your business on paper and focuses on the financials and activities needed to be successful.
2. Little demand for your services or products
You might think that your product or service is fantastic; however, if other people or businesses don't agree, this will be a significant issue for your fledgling business. There are several reasons why your products or services won't sell. These include:
Adds no value to the business or individual
There is too much competition, or the supply exceeds the demand
Your product or service is too complicated or adversely too generic
Your prices are too high
Poor quality
Poor service
As part of your business planning, it is essential to do market research - including your target customers, competition, and pricing.
3. Running out of cash
I'm going to cover two related issues here. Firstly, and the simplest to address, those who give up their job to start a business, believing that their business will bring in enough income to meet their needs. Often, they underestimate the time and cash required to build a business that will generate enough profit to sustain themselves. My advice here is to ensure that you have enough savings to invest in your business and keep you going for at least six months.
The second is a poor understanding of cash flow and the difference between the timing of money going out of the business, e.g., people costs, inventory, marketing, premises etc., and cash coming in through sales. The amount of cash your business needs to cover outgoings before money comes into the company is called Working Capital.
4. Knowledge and skills gaps
You have the passion and hopefully the knowledge about your product or service; however, it is unlikely that you will know everything about setting up and running a business. A lack of knowledge can cost your business money and take time. It is essential you get the right advice and guidance from the right people in the areas where you have skill gaps. This knowledge can come from places such as
UK business websites
Your accountant – on financial matters
Specialists - branding, websites, social media, employment law etc
Business coach and mentor - specific guidance for your business
5. Ineffective marketing
Put it on a website or social media, use Google Ads and Facebook ads etc., and the business will come rolling in, I hear people suggest. If only it were that simple. Taking this approach is one of the fastest ways to burn through cash and fail. Marketing your product or service should be well thought out before you spend a penny. Who is your target market (age, gender, location etc.), what is the demand? How much are you prepared to spend on acquiring a customer, and how much profit are you expecting to generate from that customer.
Invest the time to create an effective marketing plan as part of your Strategic planning and constantly monitor the results and adjust where you are allocating your marketing funds accordingly.
Find free or low-cost ways of reaching your potential customers, make it clear what value you are offering and how much it costs
6. Effectiveness and productivity
This is probably one of the most significant areas of concern that my clients initially come to me with. Soon after deciding to start a new business, spending hours of internet researching, website building, branding, finding suppliers, marketing, etc. They are overwhelmed, losing focus, stressed, exhausted, procrastinating and just generally all over the place. Most have viable aspirations but are trying to do too much all at the same time. We have already discussed how essential business and strategy planning is and done effectively; this will drastically reduce the issues described above by laying out clear tasks and priorities.
Another approach is accepting that you may not be able to do everything in the time required and outsourcing some of the activities, such as designing your brand, building your website etc. Taking this approach may cost you slightly more in the short term but will relieve the pressure, allowing you to focus on the parts of the business where you can add the most value. Finally, working with a business coach/mentor will pay significant dividends as they will provide you with a sounding board, act as your accountability partner and help you to prioritise the most critical activities.
7. Financial management
Sound financial management is probably one of the most challenging areas to get to grips with, particularly if you find working with numbers hard. You will need to understand key metrics, like sales, revenue, gross margin, costs of goods sold (COGS), overheads, net profit, and cash flow. It is worth taking some time to understand some basic accounting principles and the relationship between these metrics and terms. As mentioned previously, having enough cash to run your business is critical, followed closely by Net Profit, which ultimately will be your income (after taxes).
Having a good accountant or business coach/mentor will help you understand the impact of certain business decisions you will take on the above.
8. Employing people
If you are a solopreneur, this will not apply to you; however, there are a few areas worth considering if you are employing people.
The first, and related to financial management, is understanding all the costs associated with hiring people. Different things need consideration depending on whether you hire freelancers (contractors) or employ them on PAYE (pay them a salary). One of the most significant issues with using freelancers is understanding the implication of IR35 regulation. IR35 regulation should not apply to start-ups and small companies but is worth checking out. The other issue when hiring staff is understanding all the costs, e.g. National Insurance (NI) contributions which can add about 13.8% to your expenses; check with HMRC or your accountant for information specific to your business. It is also essential to understand your obligations around holiday, maternity and sickness pay.
The second vital thing to consider, especially when employing your first employees, is to ensure that they fit culturally, help you grow and generally be an asset to the business. Select your early employees wisely – they will be the foundation of your company. The last thing you will need is disruptive or unreliable employees or people that require too much hand-holding - you will have enough to do elsewhere.
Finally, worth noting, when starting out, is the importance of keeping costs as low as possible, so consider using part-time staff or freelancers and contractors instead of salaried permanent staff. This approach will allow you to have more flexibility around your staffing costs.
9. Your health
Setting up your new business will be like a rollercoaster – big ups and some downs too. It can become all-consuming, from the moment you wake up to the time you go to sleep. So recognising when you need a break will be as important as working on your business. Working 18 unproductive hours a day is worse than working 8 or 9 focussed hours and achieving results. The main message I want to give is to follow these simple rules – break big tasks into smaller ones, celebrate small successes, eat healthily, get enough sleep and find time to do something unrelated to your business each day. When you come back to it, you will find that you will have fresh ideas, be more focused, and achieve your goals quicker and more effectively.
Alex Miller is a professional business coach and mentor, working with start-ups and small businesses in the UK. Find out more by clicking here Eiger Coaching