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Strategic decisions that will help start-ups survive beyond their sixth birthdays

By Fredrick Ogola | March 29th 2016

Those of us who deal with small businesses on a daily basis are well aware that many of them will fail in their first five years.

These odds are a big reason the acquisition of well-established businesses is more advisable — they have a higher probability of success than start-ups.

Statistically, 80 to 90 per cent of start-ups will fail in their first five years. Therefore, as one would expect, the probability of survival increases with a firm’s age. This is called the ‘liability of newness’.

The following decisions can help your start-up live beyond its sixth birthday.

1. Start your business for the right reasons. Some entrepreneurs get into business for the wrong reasons. Do you think that if you had your own business you’d have more time with your family? Or that you wouldn’t have to answer to anyone else? Would your sole reason for starting a business be to make a lot of money? If so, think again.

Start a business because you have passion and love for what you’ll be doing, and strongly believe — based on educated study and investigation — that your product or service would meet a real need in the market. Get into business because you have drive, determination, patience and a positive attitude. When others throw in the towel, you are more determined than ever. Failures don’t defeat you. You learn from your mistakes. Studies of successful business owners have shown they attribute much of their success to ‘building on earlier failures’.

Get into business because you thrive on independence, and are skilled at taking charge when a creative or intelligent solution is needed.

2. Ensure you either have competence on the management side, or bring in a professional to manage areas you aren’t good at. Many reports cite poor management as the number one reason for business failure.

New business owners frequently lack the relevant business and management expertise in areas such as finance, purchasing, selling, production, and hiring and managing employees. Unless they recognise what they don’t do well, and seek help, business owners may soon face disaster.

They must also be educated and alert to fraud, and put into place measures to avoid it. Neglecting a business can be its downfall. Care must be taken to regularly study, organise, plan and control all operations.

This includes the continuing study of market research and customer data, areas that may be disregarded once a business has been established.

A successful manager is also a good leader who creates a work climate that encourages productivity. He or she is skilled at hiring competent people, training them and is able to delegate.

A good leader is also skilled at strategic thinking, able to make a vision a reality, and able to confront change, make transitions and envision new possibilities for the future.

3. Ascertain how much money your business will require. This includes not only the costs of starting out, but also of staying in business.

A common mistake with many failed businesses is having insufficient operating funds. Business owners underestimate how much money is needed and are forced to close before they have had a fair chance to succeed. They may also have unrealistic expectations of revenues from sales.

4. Choose your location wisely. Whereas a good business location may enable a struggling business to ultimately survive and thrive, a bad location could spell disaster for even the best-managed enterprise.

The factors to consider when setting up include: where your customers are, accessibility, parking, lighting, location of competitors, and the condition and safety of your offices.

5. Have a business plan. Many small businesses fail because of fundamental shortcomings in their business planning. It must be realistic and based on accurate, current information, and educated projections for the future.

Additionally, most bankers request a business plan if you are seeking to secure capital for your company.

6. Invest in revenue-creating assets during initial expansion. Add a fan in your barbershop if customers getting their hair cut are willing to pay a premium to get their services in an air-conditioned place. Remember, a leading cause of business failure is overexpansion, which often happens when business owners confuse success with how fast they can expand their business.

A focus on slow and steady growth is optimum. Many bankruptcies have been caused by rapidly expanding companies. If expansion is warranted after careful review, research and analysis, identify what and who you need to add for your business to grow.

Then, with the right systems and people in place, you can focus on the growth of your business.

7. If you have a business today, you need a website. At the very least, every business should have a professional-looking and well-designed site that enables users easily find out about the business and how to avail themselves of its products and services.

Remember, if you don’t have a website, you’ll most likely be losing business to those that do. And make sure that website makes your business look good.

Ultimately, when it comes to the success of any new business, you — the business owner — are the ‘secret’ to your success.

For many successful business owners, failure was never an option. Most self-made millionaires possess average intelligence. What sets them apart is their openness to new knowledge, and their willingness to learn whatever it takes to succeed.

The writer is senior lecturer, strategy and competitiveness, and academic director, MBA programmes, Strathmore University. [email protected]

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