With the increased unemployment, more people are deciding to venture out on their own or with partners to startup a new business. However, the success rate of new startups is not very good.
“The impact of the national recession is evident in the business survival rates for the years 2003 through 2006. The national recession impacted the business climate primarily during 2008. The percentage of businesses surviving was much lower when the survival period included 2008, which would be the five-year period for businesses born in 2003, four years for businesses born in 2004, and so on for those born in 2005 and 2006. For those born in 2006, the two-year survival rate was 58% compared to a rate of 59% to 61% in prior years. The four-year survival rate for businesses born in 2004 was only 35%, compared to a rate of about 45% in other birth years when 2008 was not included in the survival period.” (Big Sky Business Journal: Success Rate of Business – Wednesday, 17 June 2009)
These entrepreneurs have a vision for a new business, but usually lack one or all of 4 key factors to make it successful.
First, startups are usually undercapitalized from the beginning due to lack of research to determine the costs in creating and operating the new business. Costs for legal, accounting, marketing and supporting administrative functions need to be properly determined and budgeted beforehand. Also, a catchall expense account should be created for miscellaneous unbudgeted expenses. Many companies underestimate these costs and therefore overestimate their profits and compensation. In addition, with credit facilities being unavailable to most startups in this economic downturn, it is imperative to have a realistic budget and enough cash reserves to get the new venture through these difficult times until the company becomes cash positive.
Second, most of the entrepreneurs do not want to do the day-to-day operations. Having a strong team is critical to any successful organization. So how do you create a strong team without creating a lot of expense? Building a basic infrastructure to do the day-to-day work, while paying an outsourced firm to guide and develop the staff or to complete certain tasks above the competency level of the support staff will free up needed cash. The entrepreneurs or partners will have the flexibility of increasing or decreasing the outsourced firms workload based on how the new startup is achieving their financial targets. This results in reduced costs. As the company grows and a full-time resource can be supported, hiring a new CFO or Controller will be beneficial.
Third, designing a strategic plan that includes both overall corporate and department goals that are both reasonable and quantifiable need to be followed and measured. An upcoming blog on strategic planning and budgeting will be forthcoming.
Fourth, establishing policies and procedures early in the growth of the company is crucial. The establishment of processes and internal controls will improve operating efficiencies and reduce financial risks, while reducing the need for unneeded overhead.