The arrival of the New Year provides SMEs with a fresh start, opportunity for growth and a sense of optimism for what can be accomplished within the next twelve months. With new objectives to achieve and targets to meet, it’s understandable that businesses want to push their workloads as far as possible.
However, setting unrealistic expectations for the year ahead can result in serious consequences for your business. Whether it’s a result of over estimating your workload, or improper financial management, there are many ways small businesses can impede their own growth.
It’s estimated that 96 per cent of small businesses fail within the first ten years. Want to avoid becoming part of this statistic? Check out four areas SMEs continually fall short in over the New Year and how to avoid falling victim to any of them.
1. Taking on too much
After analysing data from the previous year, the determination to surpass these figures can cause businesses to take on impractical workloads. Perhaps you are considering expansion, or doubling last year’s sales? Whilst determination is favourable, it must not be at the expense of profitability.
Unfulfilled orders
Although taking on additional work might appear serviceable, especially if you’ve identified significant cash inflow improvements, promising too much and delivering too little can adversely affect customer satisfaction and therefore profit margins.
Before agreeing to additional work, ensure that you evaluate your business’ current financial position to determine the additional expenditure required to complete the work. Will you need to hire more employees? Can you afford the extra raw material costs? Do you have sufficient inventory control?
This will help determine whether the return on investment (ROI) will be sufficient enough to justify the added expense.
Over-expansion
While growth is desirable, over-expansion is a serious error. Wanting to be the first to market with a new product, taking on added overhead, or trying to prove to anxious investors that you’re growing can all spur you to over-extend your business financially.
For instance, you may open a new location prematurely, or be so convinced that your new product is going to take the world by storm that you invest heavily and order way too much inventory, leaving you with stock you’re now unable to sell.
Make sure your business is stable before considering expansion. Conduct thorough research to ensure the time is right and the funding is available; this should be carried out carefully and strategically.
If you’re considering a new product or service, measuring local and regional demographics and identifying spending trends will determine whether your innovation will be financially beneficial. There’s no point investing in something that won’t meet consumer demand.
With a new location, you must deliberate the long-term obligations. Will expansion result in any economies of scale advantages? Will new premises expose you to new customers? Failing to consider factors like this could lead to negative outcomes.
For instance, if a local clothing store owner carried out little research before deciding to expand and signing an eight-year lease for other premises, they may find that the additional store doesn’t generate sufficient income, meaning that anyone who purchases the business will have to assume that 8-year lease which is a huge financial obligation.
This could result in the cost of the lease decreasing the value of the company and therefore affecting how much a buyer is willing to pay. Researching the local area will also determine whether your new location will face competition from more well-established brands. By outlining the benefits and potential risks of opening a new premises, your chances of rushing into an uncertain investment are significantly reduced.
2. Choosing the wrong type of finance
Urgency
For small businesses who encounter unexpected hurdles or experience seasonal trends, access to immediate funding is essential, as it can ultimately mean the difference between a business surviving or closing. If you require a loan for paying wages or utility bills required to keep your business operational, then finance will be required immediately.
In this situation, an alternative finance lender will meet the requirement of speed. These resources are widely available online with funding approved and supplied on the same day. In comparison, traditional bank finance can take several weeks or even months for the funding to reach your account if it’s successful.
Additionally, alternative finance options such as cash advances do not require the extensive paperwork that is necessary for traditional bank financing. Overall, cash advances are a suitable alternative to business credit cards for short term lending.
Asset-Based Financing
Asset-based finances are usually aimed at rapidly growing, highly leveraged, companies. They are well-suited to manufacturers, distributors and service companies with a leveraged balance sheet who experience seasonal or cyclical cash flow difficulties.
Unfortunately, asset-based finance might not be right for a new small business. Aside from being difficult to obtain, they can be considerably more costly than traditional loans. Their interest rates vary greatly and banks will sometimes include additional ’audit’ and due diligence fees to the overall cost of the loan.
Bank Loans
Bank loans are a time-honoured and reliable method of financing a business. They are available to finance the purchase of inventory and equipment as well as to obtain operating capital and funds for business expansion. Overall, the amount of money a bank lends is based on the overall value of the business.
One of the main advantages of a bank loan is that the bank does not take any ownership in the business it is lending to. Also, their personnel do not get involved in any aspect of running the business. Once a loan is paid off, there is no obligation for the business to stay involved with the bank lender unless the borrower wishes to request a subsequent loan.
However, a bank loan for a new business potentially runs the risk of being too expensive to pay back, with rigorous payment plans usually applied. Furthermore, bank loans are extremely difficult to obtain unless a small business has an impressive sales track record or owns valuable collateral such as a bricks and mortar property; if not, the bank might also impose a ‘lien’ on the owner’s private property.
3. Giving up after not seeing immediate results
Approximately 60 per cent of businesses fail every year because of impatient entrepreneurs. It’s important to remember that a business does not grow overnight. It takes time for any business to start bringing in enough income align with their cash flow projections.
Impatience can also result in serious financial consequences. For example – for the development of the iPhone 6, leading technology innovators Apple decided to partner with GT Advanced Technologies, a company who had developed a suitable way to cook sapphire crystals into a phone screen to prevent cracking and scratching.
GT Advanced Technologies hadn’t sufficiently mastered the technology or worked on such a large scale, and increased pressure from Apple resulted in the sapphire crystals breaking after cooking for a month, rendering them unusable. Statistics indicate Apple wasted approximately $1 billion on building the sapphire factory, suggesting that this innovative idea was lost because Apple didn’t allow it the time it needed to succeed.
Apple could have avoided this huge financial loss by implementing objectives that allowed for realistic completion estimates. Ensure your business’ objectives are S.M.A.R.T (specific, measurable, achievable, realistic and time-bound).
If you’re intending to achieve a certain level of sales your objective might be to ’Increase sales over the previous year, by 14 per cent per month’, i.e. base your prediction on previous figures instead of your own expectations.
You should use your cash flow forecast from last year to determine the levels of inflow and outflow that will be generated from striving to achieve these sales. Planning and mapping out the process will provide clarity and a sense of urgency to achieve your business goals.
4. Not staying up to date with consumer demand
Connecting online and offline through local SEO
The constant shift within industry trends is causing consumer demand to fluctuate; meaning businesses need to cater for both online and offline shopping. Whether it’s by searching on a mobile device or browsing high street shops, we expect to receive enough information to allow us to complete online and offline purchases.
Statistics show that 81 per cent of consumers research products online before purchasing in store, so connecting the online and offline customer journey has never been more important; – focusing on one is no longer enough.
When shoppers search for a store name or category online they expect to see a map with directions, a phone number they can easily click-to-call, or special offers that match their location and time of day. This is where Google My Business comes in.
Google My Business is a fundamental necessity for local SEO. Providing your business with significant visibility for local SEO searches in search engine results pages (SERPs). Ensure your listing includes your business name, correct address, relevant categories, high-resolution images, phone number, opening times and any other information you believe would benefit potential consumers.
Above is an example of how River Island have used Google My Business to help their Biggleswade store stand out to online customers. Any nearby searchers who want to take advantage of any in-store sales advertised online could find their closest store easily, allowing a complete connection between the online and offline journey.
Remember – it is vital that the information on your profile matches all other information about your business location across the web, because consistency is the key to succeeding at local SEO.
Social Media Advertising
According to Marketing Week, 56 per cent of consumers follow brands on Facebook to see products. This means you could be missing out on consumer engagement by neglecting social media. Through Facebook Business you can create an ad account and produce advertisements based on the demographics, interests and behaviours of your existing audience. This allows you to connect with users who are likely to engage with your product or service and increase your reach.
Your adverts can be personalised further through the inclusion of call-to-action buttons, with call outs such as Book Now, Shop Now, Contact Us or Sign up. For example, Carphone Warehouse used the ‘Shop Now’ button on an ad promoting their iPhone 6 sale, linking directly to a dedicated landing page for the product.
This significantly reduces the customers’ time spent trying to find the product they are after, making them far more likely to convert into a sale. Including a check stock in store option also bridges the gap between offline and online sales, as users can retrieve the information they require in order to decide over a purchase.
Although the New Year provides SMEs with the perfect opportunity to innovate and implement changes based on the previous year’s figures, understanding how these choices will impact your business from a validation standpoint is vital for ensuring your decisions will put you on the path to future success.
Written by Rob Straathof, CEO at Liberis UK
Further reading on New Year
