Why a Business Can Fail During the Early Stages of Operation - Essay Example

WHY A BUSINESS CAN FAIL DURING THE EARLY STAGES OF OPERATION? Introduction Every business establishment, either big or small is naturally defined by two diverse perspectives i.e. failure and success. Indeed, these terms are often used interchangeably, but in this paper, a negative perspective (failure) is chosen for the review of the causes or the reasons for failure of businesses at early stages. The concept of failure has received a number of definitions already, and is commonly defined either as the ownership discontinuance of a company or as the discontinuance of the enterprise itself (Everett and Watson, 1998). Above all, the concept of failure of an enterprise is elaborately defined within the context of the studied firm’s characteristics. Nonetheless, even though terms like bankruptcy can sometimes be used to describe the failure, a business that stop either operating due to withdrawal or acquisition without any liability is not apparently classified as failed. The criteria to classify an organization as either failure or successful is sometimes predicted by Banks, credit managers, and venture capitalists (Carter and Evans, 2006). Perhaps, one theory that better describes why most businesses are likely to fail is the complexity theory, for it provides a new perspective from which new businesses should be observed. The theory illustrates that the current growth of start-ups is undeniably a chaotic process, entirely distinct from the traditional methods (Tsai and Lan, 2006). Young businesses are prevalently prone to failure in the UK, and the rate is evidently high. As established by the UK department of industry and trade, failure amongst these emergent businesses underneath the VAT threshold is predominantly high (Financialpreneur.com, n.d.). Many studies have been done to unearth the reasons for business failure especially at early stages in the UK, with small and medium enterprises in particular. The motivation for these studies as stated by Abdel Samad, is the fact that, even though the failures can never be entirely eliminated in an enterprise environment, the failure can be reduced if the underlying causes are detected early and action invoked (Everett and Watson, 1998). Conventionally, these factors causing failures are extensive and often divided two, the external and internal reasons. The external include the government intervention, support groups i.e. venture capitalists, business location, and competitor underestimation whereas internal factors include poor planning, underfunding constraints, poor financial management competence, and inadequate market research. In this paper, I will connote the above reasons why businesses are likely to fail during early stages. Poor start-up planning Planning is one of the essential steps for successes of business, and devoid of appropriate planning only means an inevitable failure. Planning entails a well-crafted business plan which encompasses all essentials for successive business establishment. Essentially, a business plan should serve as a framework to illustrate the vision of the start-up, and also convening the subordinate to facilitate the attainment of the vision. This simply means it is as important as the idea or business concept itself and therefore should be number one priority before operating any business. Research has often indicated such poor planning as the being responsible for most companies to fail. For instance, a research by Derek and Doug established that entrepreneurs who do not have a progressive or succession plan identify the foremost barrier to business progress (Carter and Evans, 2006). Such entrepreneurs might put all their efforts in turning a small enterprise into bigger corporation in vain unless they have a workable business plan (Financialpreneur.com, n.d.). The primary excuse given by most entrepreneurs is that, it is too early to plan, but over time they have been proved wrong. According to Derek and Doug, the established that most businesses specialized advisers pointed out that it was never too early to draw a plan (Carter and Evans, 2006). However, research by Tsai and Lan on the complexity theory perspective about the development of start-up businesses proposes an alternative. They established that since entrepreneurs cannot easily predict the materialization of a new order, it is hard for them to institute advance plans, but instead, they can rely on company’s vision as a framework of their actions and sustain elasticity with regard to future growth (Tsai and Lan, 2006). Poor planning is also evident in the in finances and expenditures, and it always a challenge considering the meagre budget that an entrepreneur is faced with at launching. Therefore, if not managed correctly and allocated, one department may face a deficit and cause the whole business to falter. Under funding of businesses This factor is related to planning and is another recurrent mistake that most small businesses make, by just underestimating the finances necessary for the company’s launching. Most start-ups today fall short within the first few months after establishment because either they run out of money or their anticipation to obtain credit from banks fails (Walker, 2004). This is ultimately a consequence of poor planning. A well-considered business plan will acquaint an entrepreneur with the exact amount of money required for business expenditures and how to run the company until a positive cash flow is attained (Pendrith, 2014). Lack of development of cash flow and income statements at least within the two years of business operation further heightens the chances of business failure. These are remarkable creations, as they will serve to tell if the firm has adequate funds to uphold the company till it attains the profitability (Pendrith, 2014). As held by the US department of Commerce, small business fails because they do not use the available financial information suitably. Some entrepreneurs have no cash and the only expectation is that the bank will come to their aid, and often the bag their expectation that banks will fund them based on their good innovations (Pendrith, 2014). Unfortunately in most instances, banks do not buy such ideas for they consider such owners as a reflection of the inability to manage money particularly if they have no cash. Poor Financial Management Skills In line with financial management, one theory that concurs very well with the current state of start-ups is the complexity theory, whose perspective sustains that young businesses are dissipative constructions, and are for that reason always difficulty at attaining equilibrium (Tsai and Lan, 2006). From this understanding, financial administration becomes a vital aspect of business growth that does not only need a one-time consideration, but rather a progressive management. According to Stefan deficiency of management skills results in inadequate operational capital and other financial constraints, a major reason why business do not survive at early stages (Financialpreneur.com, n.d.). Consequently, as held by Mark Friedman, Real Time Strategy founder, businesses are possibly going to fail if they do not monitor the progress of the working capital in terms of accounts payable, accounts receivables, and cash at hand (Financialpreneur.com, n.d.). He further acknowledges that a liquidity crisis is inevitable when business operations are going well together with cash flowing, because new business managers have a propensity of not preparing the next round success. This is simply what the complexity theory envisages; the progressive growth of start-ups is a chaotic process that demands continual fitness (Tsai and Lan, 2006). Therefore, the monitoring especially of cash flow is very paramount. As remarked in the Barclays Bank’s report on the challenges UK small businesses face, cash flow is a critical measure of a firm’s capacity to sustain adequate financing to pay for its current liabilities (Barclays bank). An entrepreneur, therefore, ought to manage the finances by developing an ample budget each time before investing in any asset or liability. Consequently, stabilisation of the cash flow will deter wastefulness and promote effective investing. Despite most start up owners believing that money is the main necessity to a run a business, inadequacy of entrepreneurial skills has become one of the most notable cited reasons why small businesses fail. According to Paphitis, the retail magnate and a passionate advocate for entrepreneurial education, the reasons as to why most small businesses falter is because the entrepreneurs have not done research, do not know who to fund them, and general not doing their homework (Burke, 2014). Paphitis draws a comparison between academic and entrepreneurial education and states that they are not different. He further holds that the United Kingdom start-ups’ fail rate will drop if entrepreneurship in incorporated in the schools’ curriculum from age eleven (Burke, 2014). Elsewhere, Dun’s research reveals that 90% of entire business failures and shortcomings are the result of owner’s low level of managerial expedience (Pendrith, 2014). What this illustrates is that even though the owner of a business is an excellent salesperson, he may lack the proficiency to handle the apparently routine day-to-day operations to keep the company running. Business owner being deficient in of the entrepreneurial dexterity would possibly cause business to fail, particularly during the early phases of a new corporation. However, the performance start-up companies rely on a number of variables such as the owner behaviours, owner character, and ecological influence. As stated by Charles and Frank, the potential businessperson has the capacity to control, direct, or regulate the result of each major undertaking. Entrepreneurs have a dire need for triumph, and they are often higher risk takers. Consequently, the personal and individuality character of an entrepreneur can be a reason for business to fail (Shonesy and Gulbro, n.d.) Inadequate market research It is a standard advice that before setting up new business, is important to get answers to a number of questions about the customers and the market. However, several businesses fail to undertake such a fundamental exercise, and the aftermath is a collapse of the enterprise. The presumption of this step is can be a painful experience because perhaps the company might have satisfied all other factors in the exclusion of market research. The process of market research engrosses the systematic gathering, recording, and analysis of data regarding the market for the company’s product or service (Barclays bank). Some of these queries include; what is the target market? Who else is in this market? Where are customers based? And so forth. The researcher may also carry out secondary market studies which include perusing the already published reports and statistical data to enable him to decide on the marketing mix (Barclays bank) Another common mistake in market research is the poor selection of the market (Ann 2005). A marketer may select a place where customers do not need a product, and such can constraint the whole strategy. Instead, the marketer should carry out a market needs study. This will permit the entrepreneurs to focus their energy on the obtainable and limited resource rather than spreading out for unfocused market. Critically though, it is paramount that entrepreneurs to comprehend the scope and usage of the marketing skills while observing the competitors and always emerging ahead. Whilst it is reasonable to kick off a business that sells the finest products and services at a competitive price, a company can tranquilly be at risk for collapse since the targeted client base may not be aware of the products and services (Go4funding.com, n.d.). External factors Much as there are internal factors that lead to small businesses failing at early stages, some external factors leading to this failure are also prevalent. The environment, competition, government measures and legal frameworks, both have the preponderant influence on the performance of start-ups. These external factors must be given equivalent consideration and adequate attention in all decision-making process. Such is so because, undoubtedly customers, government, competitors, social groups, and raw material suppliers all have an effect on the company’s operations more or less uniformly. The most adverse cited factors for failure include Government measures, business location, and underestimation of competitors. Government measures: Government actions that are aimed to reach out start-ups are crucial today than even before, considerably because of the complexity of the modern enterprises. Despite the UK government exempting the small business from VAT, evidence from a study by UK department of industry and trade suggests that embryonic businesses failure below the VAT threshold is predominantly high. Further, the report remarks that there is a likelihood of the businesses failing even after ten years, and the possibility is as high as for companies established just few years (Financialpreneur.com, n.d.). Consequently, research by the Silicon valley Bank called the start-up outlook report takes a comparative approach between start-ups in UK and those in the US. From the report, nine out of ten entrepreneurs interviewed indicated that the U.K funding for small businesses is challenging and over a half said that government initiatives would help the small business owners with access to government grants (Silicon Valley bank, 2013). This is a clear indication of frustrations that the new entrepreneurs undergo sourcing for capital necessary for initial operations. Venture Capitalists support. Venture capitalists’ support is very vital to small businesses in the UK, but the unwillingness to stretch their hand to reach out young entrepreneurs is a reason for high start-up fail rate. According to a study of start-ups the Harvard business school, 3 out of 4 of new businesses are likely to fail Jobbins, 2013). The study further established that small businesses are probable of failing when venture capitalists shy away and do not support them, typically since they may not have capital to sustain start-up particularly if the model doesn’t pick immediately. Mr. Ghosh held that venture-supported firms are only likely to falter beyond their fourth year if the investors discontinue injecting more monies (Jobbins, 2013) Underestimating the Competition: There is no single business that exists in an entirely free market, if any exists, it is only for a while before another with the same model is likely to emerge. Such is evidently in the current business environment, where a competitor will try to pre-empt from initial entrepreneur’s mistakes. It is, therefore, imprudent for one to underestimate competition otherwise failure is inevitable (Waal, 2004). Nonetheless, many business owners seem to underrate the competitive hand repeatedly (Pendrith, 2014). Indeed, if any entrepreneur is sensitive enough to competition, once there is a perception of a new entrant in his line of business that is taking away customers, the firm’s owner ought to aggressively initiate steps to secure the client base (Pendrith, 2014). Such measures could include lowering prices, extending terms, offering package, introducing innovative products, improving extending warranties, product quality, increasing marketing sphere (Pendrith, 2014). Competition is actually an opportunity to heighten the business strength and customer base, but, unfortunately, new business entrants do not make it a consideration. Poor location choice: The location of the company is critically an important consideration if the firm has to attain success. Whereas the definition of the term is relative, a good location is an appropriate setting that appeals to broad customer base, and consequently proving a viable location that can minimize the cost and maximizing gains (Waal, 2004). Therefore, a proper location can enable a struggling business to thrive finally, but a business especially new enterprise located in a hidden area will be disadvantaged. Most of these disadvantaged businesses may have failed to take consideration of location factors before establishing a company. These factors answer the queries about the targeted customer’s way of life or culture, accessibility, the traffic and parking, the distance from available competitors, and the safety condition of the location. Every proprietor must awake to these concerns and consider these challenges as an opportunity to discover and grow as an entrepreneur (Pendrith, 2014). Conclusion Considering the studies that have been instituted in finding out what is ailing the start-ups in the UK, is paramount to state that the fail rate is still persistent in early stages. Consequently, the modern business environment is seemingly becoming hard to conceptualize, and therefore a better approach that will bring all stakeholders together is necessary. Perhaps, the complexity theory is what provides the new perspective from which new businesses should be observed. As stated herein, the theory illustrates that the current development of start-ups is undeniably a chaotic process, wholly distinct from the traditional theories (Walonick). The reasons for failure range from lack of a business plan, management skills, underfunding, inadequate research, insufficient government measures, poor location, competitor underestimation, and lack of capitalists’ support. Nonetheless, one can no longer just plan once and sit back, but rather make it a progressive venture. Both the external and internal reasons for the failure at early stages are addressed better by the complexity theory, which affirms that the business’s vision should forever remain the guideline for growth of the firm. The outcome of the analysis only shows the underlying challenges that most young entrepreneurs undergo. Ultimately, all stakeholders- entrepreneurs, government, and support group need to have a standard approach if there is a necessity to reduce the fail rate. Bibliography Bank, S. V., 2013. Startup Outlook 2013 Report. London: SVB. United Kingdom: London’s tech startup boom, 183. Burke, C., 2014. Theo Paphitis: too many startups fail. [online] the Guardian. Available at: http://www.theguardian.com/small-business-network/2014/jul/08/theo-paphitis-startups-dragons-den [Accessed 3 Dec. 2014]. Carter, S., & Jones-Evans, D. (Eds.)., 2006. Enterprise and small business: principles, practice and policy. Pearson Education. Everett, J., & Watson, J. (1998). 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