Ten risks of starting a business
Regardless of the industry, many new businesses face common difficulties. Discover our top 10 and learn what to look out for as you get started.
Business pundits and advice blogs have differing views on why businesses fail, each publishing their own lists of top three to five small business risks to watch out for.
Unfortunately, businesses face more risks than these articles specify and end up denying new entrepreneurs a broader view of the risks of starting a new small business. That’s why we’ve compiled ten common risks of starting a business below, so that you can build a more comprehensive view of the pressures facing your small business and future growth.
- Managing cash flow
- Finding your niche and marketing your value
- Ineffective sales funnel
- Competition
- Lack of scalability
- Overcoming red tape
- Operational challenges
- Entrepreneurial burnout
- Opting for quick sales tactics rather than long term development
- Expansion into new market
1. Managing cash flow
Cash flow management is an especially acute risk when starting a new small business. Recent data shows that poor cash flow renders as much as 82% of new small businesses unsustainable within their first five years.
Failure to properly manage cash flow is caused by two main factors: failing to raise cash when businesses need it (either from debt/equity financing or improving sales revenues) or failing to cut excess expenditure.
Solid cash flow management is critical because small business owners need the flexibility of directing capital at short notice, mostly to meet the unexpected investment needs of their business. Without cash to underpin advertising campaigns or inventory turnover, businesses quickly struggle to function. Consider whether modern accounting solutions can help illuminate cash flow issues in your business and speak to your accountant about investment strategies.
2. Finding your niche and marketing your value
A second risk of starting a new small business is in meeting the demands of the market – specifically finding their niche and demonstrating their value. Failing to find a successful niche was ranked the second most common reason for startup failure in a recent analysis by CB insights.
When conducting market research, there’s often an element of subjectivity over the results. Businesses need to make sure they’re paying attention to customers’ genuine needs and wants so they can position themselves to meet them and quickly demonstrate evidence of this value to customers.
Both steps are critical to avoid this particular risk. Failing to find a niche (by ignoring or misunderstanding customers’ feedback) can result in poorly optimised products while lack of customer interest can result in low sales revenues and cash flow problems.
3. Ineffective sales funnel
Even once you’ve captured your customers’ attention and they’ve understood your value, you need to ensure you’re constantly generating sales. Otherwise, new small businesses risk becoming complacent. If you find that your conversation rate is low, you’re not alone: the average cart abandonment rate according to SaleCycle data is over 80%.
Unfortunately, e-commerce businesses don’t have the benefit of well-trained sales staff that can tailor sales strategies to each new customer. Instead, e-commerce businesses have to rely on content marketing strategies and website design to entice customers into purchasing.
Seemingly small factors like the number of steps in a transaction or the way delivery information is conveyed to customers can drastically increase cart abandonment rates. If you’re noticing lots of website traffic or product views but low sales, try simplifying your process or clarifying upcoming steps customers can expect.
If you’re an e-commerce business using an established platform like Amazon or eBay, you obviously have less direct control over transaction funnels. However, you can still tweak your product descriptions to be more compelling for customers and optimise your store for the platform you’re on.
4. Competition
Another risk to small businesses is fierce competition, especially if your business is up against larger organisations with more resources. The latest ONS figures show that e-commerce is an exceedingly popular industry to enter, coinciding with the recent uptick in online sales.
When finding and demonstrating your business’s niche, it’s not enough to only consider how customers can understand your value. Small businesses also need to convey why they’re more valuable than their competition, too. This nuance should feature in your marketing strategy so customers can better understand their options and identify you as the best.
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5. Lack of scalability
E-commerce businesses rely on a high volume of sales to remain viable, so scalability is key. Unfortunately, certain product categories or services have limits. E-commerce businesses with a bespoke or local focus are particularly at risk, as well as software providers with a small user-base or ‘freemium’ business model.
If you’re keen to increase your revenue but are finding that your market size is capped, consider where you can diversify products and services and maintain new revenue channels. Diversifying your business can help you avoid over-investing in a single product and maintain your existing customer base while you expand to find new ones.
6. Overcoming red tape
Unlike competition from market forces or poor management choices, governments and regulatory bodies place hard requirements on businesses’ profits and policies. Violating regulations (even accidentally) can cause immense trouble for new small businesses.
Therefore, new entrepreneurs must familiarise themselves with the legislation that governs their business, including customs processes, tax rates and deadlines, consumer protection legislation, and safety requirements. Begin by speaking with your lawyer and accountant to understand where your business might be vulnerable to legislative requirements and make sure you’re compliant.
7. Operational challenges
Like cash flow management, operational challenges in business are an ongoing issue that small business owners need to contend with. Operational management concerns how you run your business: whether it’s efficient and whether you’re spending time in your organisation effectively. New small businesses risk being outcompeted by industry peers and losing time to tasks that, nowadays, should be automated.
Facing this modernity is concerning for small businesses owners, and understandably so. A 2015 survey showed that 41% of small business owners feared losing control over their business’s processes, while around 27% were concerned about the cost of implementation. A further 26% were hesitant about the efficacy.
Fortunately, e-commerce businesses have a wide range of options that can increase their efficiency while being cost-effective and easy to implement. These systems include inventory management software that can automate orders and predict optimum stock levels, automated customer emails for abandoned carts and relationships with fulfilment centres to help alleviate logistical pressures.
8. Entrepreneurial burnout
Starting a business is stressful and draining. That’s why new small business owners need to prioritise the sustainability of their efforts in growing their business or risk entrepreneurial burnout before their new small business becomes established.
Mental health issues resulting from high, sustained stress affects roughly 72% of business leaders (compared to around 48% of the general population). Fortunately, noticing the signs can help you alleviate the pressure.
You can’t run a successful small business without a clear head. If you’re noticing yourself as irritable, tired or forgetful, try to make time for yourself and get disciplined about the amount of rest you need.
9. Opting for quick sales tactics rather than long term development
Certain tactics within the e-commerce space, like dropshipping, are risky as they prioritise short-term gains rather than long-term sustainability.
New dropshipping businesses lack control over their product’s development and quality and face scarce regional sales exclusivity, leaving them vulnerable to fierce competition. Similarly, the dropshipping business model struggles almost immediately after just a few missed marketing choices.
Despite this adversity, dropshipping is flourishing and can be highly profitable, so if you’ve got a dynamic understanding of evolving consumer tastes, it could prove to be a lucrative endeavour.
10. Expansion into new markets
With global economic forecasts predicting growth for the next five years, small businesses should consider how they can expand into new markets to capitalise.
While there are risks associated with the move for new small businesses, including new cultural customs to learn and legal frameworks to abide by, operational complexities have become more streamlined than ever.
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