Business failure rarely comes as a surprise. Most of the time, warning signs of a failing startup accumulate over weeks, if not months. Recognizing those signs gives startup founders and their teams an opportunity to change course, regroup and restructure.
No One Plans For Failure – Or Do They?
In this blog, we’re picking up where our last blog left off. Having talked about why it is so difficult to admit that things aren’t going as planned and taken a deep dive into closing a UK company, we’re looking at a different aspect this time. Over the next few paragraphs, our goal is to take a look at warning signs that allow founders and leadership teams to spot trouble early.
Spotting potential problems early gives your business and your team the time and breathing space to plan ahead. Having that time can make the difference between being able to pivot or being forced into closure. In fact, your business may not even need to pivot. By noticing warning signs as soon as possible, the company has an opportunity to address potential issues before they become serious problems.
Potential Warning Signs of Business Failure
So, what should be you looking out for? Individual businesses differ, of course. However, some of the most common warning signs are similar, no matter which industry you’re in and what your business does.
In our experience, five typical warning signs include:
- Business plans at odds with reality
- Changes in the economic environment
- Inability to recruit the talent your business needs
- Running out of money
- Lack of sales
1. Your Business Plan Doesn’t Match Reality
Business plans are to your company what your GPS is to your car. A good business plan clearly shows the direction in which your business is going, highlights milestones you are planning to hit, and allows you to compare actual performance to your predictions.
Because they are at least partially based on assumptions, business plans are not always accurate to the day, the month, or the week. But they offer enough guidance for startup founders and their teams to see whether the company is on track for growth or whether it is falling behind predictions.
To be fair, missing one milestone is not necessarily a sign of serious problems. It could simply be an indicator of your predictions not being as accurate as you thought or a changing economic environment (more about that below). Saying that, if missed milestones are starting to accumulate, it’s time to take action.
2. Changes in the Economic Environment
As a startup founder, you can influence almost every aspect of your business with one exception – the wider economic environment you operate in.
Here are two examples of drastic changes:
Example 1 – The Coronavirus Pandemic: when much of the world went into lockdown in early 2020, supply chains broke down, offices needed to close, and entire industries were in danger. Take hospitality, for example. Without the ability to serve guests, how could businesses survive? Others managed to pivot and change their operations to remote working.
Example 2 – The Ukraine War: when Russia invaded Ukraine, every single business in that country faced unprecedented uncertainty. An extreme example, for sure, but I picked those two world events to make it clear that sometimes there is nothing startup founders can do.
Other changes are more gradual. Over the past two years, many people in the UK have started to feel the impact of inflation and rising prices. As a consequence, their disposable income has gradually decreased. If your business plan relied on that disposable income, it is time to make some changes. Noting the trend toward rising prices early gives you a chance to adjust your product or target another market segment.
3. Inability to Recruit or Retain the Talent You Need
Have you heard the expression ‘The rats are leaving the sinking ship?’ High staff turnover is one of the most noticeable warning signs that something is not going right with your business. Every time a staff member leaves, the company has to spend time recruiting a new person and training that person. In the meantime, productivity suffers.
What can you do? If you’re starting to notice a greater-than-normal volume of resignations, talk to your team. Ask team members why they’re leaving and what it would take for them to stay. Honesty is often the best policy in these scenarios, and often, a higher salary is not the answer.
For startups, staff retention may be less problematic than finding the right talent in the first place. Exciting business ideas tend to attract staff members, but you may not be able to afford to hire them. In addition, you may find that you need specific expertise and input from time to time but not consistently. That is when a fractional, or part-time, executive can be an excellent option, both in terms of availability and affordability.
4. Running Out Of Money or Cash-Flow Issues
You can’t operate a business without money. It’s really as simple as that. New businesses are especially vulnerable to bottlenecks in their cash flow because they have had no time to build up a reserve.
For that reason alone, you need to watch your cash flow as a startup founder or the person in charge of your company’s financial situation. I’ve written about the importance of this a few times, but it can’t be overstated just how critical understanding basic business finance is.
There is another thing that is as important as watching your cash flow and that is knowing how you will pay for upcoming financial commitments. Do you have enough money in the bank? Is there enough cash coming in? Do you have the financial backing to grow and scale your business?
Securing investment has become harder over the past few years, making it even more crucial not to wait too long before your team starts looking for investors or other sources of finance. Being proactive in this respect and taking care of your cash flow will help prevent countless issues in this area.
However, if you are noticing that both cash flow and new investment are problematic, it may be a sign that your business is not successful in its current iteration.
5. Lack of Sales
This point is almost too obvious. If you’re not selling your products or services, your business will fail.
Every startup takes some time to generate sales and build a customer base. But, in every startup journey, there comes a point when you need to ask yourself and your team why your product is not selling.
Are you doing enough marketing? If no one knows that your business exists or what the benefits of your product are, it’s hard to generate sales. Is your pricing pitched at the right point? Too low and your profit margin suffers. Too high and you may not be generating a high enough sales volume.
Can you meet demand? A high volume of orders will not generate the profit you need if you struggle to fulfill them. Supply chain problems have mounted up over the past few years, making it more important than ever to shore up your supply chain and ensure you can meet demand.
These are just two areas that may be causing a lack of sales. If your sales are limited, it’s worth analysing every aspect of the business to find the cause.
Final Thoughts
Growing a successful startup is difficult, and there are plenty of reasons why an idea doesn’t become a sales success. If you and your team can spot the warning signs early and take action, you can often prevent the collapse of the company. More about that in our next blog. Have questions in the meantime? Get in touch.