10 common start-up misconceptions


10 common start-up misconceptionsNorman Jones has worked in the business support sector for more than ten years, helping start-ups and small and medium-sized firms. He has seen great ideas fail and what seemed like marginal businesses enjoy great success. So what are the most common mistaken beliefs he has encountered among new business owners?

"A business plan is something you produce for the bank or when you're seeking a grant"

This problem stems from the fact most people want to get on with starting and running their business. They think they know what they should do and see no need to test it or write it down. But a business plan gives you the opportunity to set goals and provides a framework to the way you see your business taking shape, which provides useful future reference points against which success can be measured.

"Market research is a waste of time. People only tell you what they think you want to hear"

With friends and family, that might be true, which is why you need to find people who will give you an honest answer - and possibly get someone else to ask the questions for you. That way, no one will be afraid to give negative responses.

"A cash flow forecast is something I need to do if my business is in trouble"

Cash flow forecasting is possibly the most useful (yet often the most neglected) business tool. I'm the financial appraiser for two grant schemes and regularly see wordy business plans that tell a good story, but lack sufficient financial information. While there may be a need to apply a few 'what ifs?', a cash flow forecast can still provide insight into your business's future financial needs. Start by estimating your costs, which you should be able to do fairly accurately. Then, if you know your margins, you can work out what sales you need to make and whether this is possible.

"I'll see how far my own money goes first and if it's not enough I'll borrow the rest"

You must work out exactly how much capital you need to start your business, as well as how much working capital you need to run it day to day. Once you've spent your own money, your negotiating power at the bank will be seriously weakened (I know - I was a bank manager for 20 years). Before granting a loan, a bank will expect you to make a personal financial contribution to the sum you require.

"If I work hard, I'll succeed"

Not necessarily - you also need a viable business idea. And in addition to a business plan and realistic cash flow forecast, you need a marketing plan/strategy, which identifies target customers and explains how you'll reach them. The scattergun approach rarely works and even if it does, it's expensive and wasteful. Focus on your target market.

"This is my business and I'll run it my way"

Fine, maybe, but seek good advice and take it. Enterprise agencies, websites such as StartUp Britain, The Prince's Trust, the Federation of Small Businesses and others can provide advice, support and possibly grants (although sound advice is potentially more valuable).

"If I charge below the market rate, people will buy from me"

Do you want to be known as the cheapest or the best? Furthermore, market prices may well have been pushed down to the limit, so simply undercutting could mean you're condemning yourself to failure from the outset. Look carefully at your pricing and cash flow needs and be clear about how much you need to sell to cover your costs, pay yourself and make a profit. What's more, capital items might need replacing in time, so you need to build up a cash reserve.

"I am not concerned about the competition – they're all rubbish!"

Never underestimate competitors, they've been trading longer than you and could well have learnt a thing or two. They may be financially stronger and able to cut their prices to force you out of business. They'll have existing customers who may be reluctant to leave them and buy from a new business. Test the market to ensure it's big enough for you and if so, enter with your eyes wide open.

"I don't need to worry about doing my books"

Making sure your books are accurate and up to date is essential. You should also complete a cash flow forecast and monitor it every month. Make sure your tax and VAT records are up to date and payments are made when due. Accept that you'll probably need to dedicate at least one day a week to admin, accounts, marketing and other key tasks - some of which you won't enjoy.

"I'll never give up"

Sometimes it's better to accept defeat and do something else. Assess your business's financial position regularly, look at your future financial needs and don't just try to borrow your way out of trouble. I've often heard said, "If only I had more X, Y, or Z", when really the business is not selling enough or not at a big enough margin. Unless this can be realistically addressed, it's only a matter of time before the business fails. Seek professional advice as early as possible if you experience severe difficulties.

Self-employment isn't easy, which is why two-out-of-three new businesses fail within their first three years. I see some 100 businesses a year and almost every owner is good at what they do but, unfortunately, not everyone is good at running a business. We'd all like to be left to get on with things we like or are good at, but running a business isn't like that. Identify skills and knowledge you lack and do something about it. Your weaknesses should not be allowed to interfere with the success of your business.