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Statistics predict that 1 in 3 Australian small businesses fail in their first year alone. This is a pretty discouraging statistic, especially if you’ve been thinking about starting your own small business. However, a closer look at the common causes of failure can provide entrepreneurs with insight regarding the mistakes they should avoid when starting a small business.
Luckily, we’ve done the research for you. Keep reading to learn more about the typical pitfalls that small businesses face in their first year and how you can steer clear of these mistakes.
Why Do Most Small Businesses Fail In Australia?
Generally, a small business doesn’t just fail by itself. Somewhere along the lines, something went wrong leading to the downfall of the business. Every business has their own reason for failing however, there are common mistakes that a lot of small business owners tend to make. Many of these issues stem from poor cash flow management, flawed business models, inadequate risk management and failing to address the legal considerations of running a business.
Let’s take a closer look at some of these below.
Mastering Cash Flow Management
Every business needs working capital to function. Essentially, working capital is the money used to conduct everyday business activities. Without it, operating a business would be difficult.
Issues arise when profit margins aren’t being met, and the business starts spending more money than it’s earning. The business could be making sales; however, a high volume of sales doesn’t guarantee that target margins will be hit. Often, clients pay businesses late or unforeseen issues arise, leaving the business without the money it needs to keep functioning. Eventually, the lack of cash flow means there’s no working capital and the business has to shut down, as sustaining it simply isn’t feasible.
Preparing The Right Business Model
It doesn’t matter how great you are at business, a business model that doesn’t work, simply won’t work. That’s why, prior to starting your small business it’s imperative to conduct research, study the market, assess any potential competitors, know your target consumers and have a strong financial plan. Keep in mind that a business model doesn’t have to be something that is set in stone. Rather, it should be flexible. It’s imperative to leave enough room to allow yourself to revisit, review and refine your business model.
Survival in business means being able to adjust and adapt. Understanding what’s working and what isn’t is key in achieving this. When figuring out the right business model for your venture, it’s a good idea to create a business plan. If done correctly, a business plan can help you build the right business model as it’s useful for providing structure, defining your goals, planning your finances and managing the potential risks.
Effective Risk Management Strategies
Risk is unavoidable when it comes to running a business. Even the most risk-averse businesses are exposed to some kind of risk. As a business owner, it’s necessary to identify the potential risks impacting our business and implement measures to minimise those risks. A few different types of risks to look out for include:
- Operational Risks: Issues that disrupt your businesses day-to-day operations
- Financial Risks: Risks related to the financial health of your business, including cash flow problems, debts, or investment losses
- Market Risks: Changes in market conditions, such as new competitors, shifts in consumer preferences, or economic downturns that can create upheaval for your business
- Compliance Risks: Legal and regulatory measures that need to be taken into account when conducting business operations and making decisions
- Strategic Risks: Business strategy choices that could significantly alter the course of your business
Once you’ve identified the risks, it’s important to develop a risk management plan. This plan should detail how your business plans to reduce risks, prepare for them, or avoid them completely. Much like your business model (see above), a risk management plan should be closely monitored for effectiveness and reviewed for improvement.
What Legal Mistakes Cause A Small Business To Fail?
Legal mistakes are another key factor when it comes to setting your business up for success. Unfortunately many business owners fail to consider the importance of legal matters until their business is in trouble – something we’ve seen one too many times at Sprintlaw.
Truthfully, most legal business mistakes are easily avoidable. Having the right contracts in place or securing ownership of your IP can go a long way in ensuring your business is protected.
Let’s take a closer look at some legal instruments that can be utilised to safeguard your small business and give it a better chance of survival.
Customer Agreements
Customer Agreements (also known as service agreements, business T&Cs or client agreements) are crucial when offering your businesses services to clients. Often, miscommunication with customers, late payments and other disputes create unnecessary setbacks for a business.
A customer agreements covers important matters including:
- The scope of services
- Payment Liabilities
- Contract duration
- Termination
- Dispute resolution methods
An expertly drafted customer contract helps secure your rights as a business and clearly communicates your terms to customers. Even if something goes wrong or a customer refuses to cooperate, your legal rights will be protected through the contract.
Trade Mark Protection
It’s not uncommon for business owners to spend weeks, even months, coming up with the perfect name for their business and designing a logo that establishes their brand identity. After all, creating a trade mark or other types of intellectual property (IP) for your business is necessary to make sure it stands out from its competitors.
However, many business owners forget to protect their IP. If you’ve got a unique business name and have designed an awesome logo, it’s imperative to secure your legal ownership by getting it Trade Marked. Remember, simply registering a business name doesn’t give you exclusive rights over it.
When you don’t secure your IP, you have very little legal protection if someone decides to copy or steal it. Rectifying such issues can be time-consuming and resource-intensive. It’s best to avoid these problems by protecting your business’s trademarks right from the start.
Shareholder Agreements
Shareholders in every business have one thing in common-they tend to disagree with each other. Healthy discussions are fine and perfectly normal for a business. However, when these disagreements get out of hand, it’s important to have something to revert back to, such as a Shareholders Agreement.
A shareholders agreement is a legally binding contract that addresses matters such as how decisions are made, what happens when a shareholder wants to leave the company, and the dispute resolution process. No matter how well you get along with your business partners, having a shareholders agreement is imperative for maintaining smooth business relationships and ensuring that one disagreement does not lead to the downfall of the business.
What Is The Best Way To Avoid Business Legal Mistakes?
It may seem like a predictable answer, but the best way to avoid legal mistakes in business is to consult with a legal expert. This is a predictable answer for a reason – it actually works.
A legal expert can ensure your contracts are tailored to meet your business needs, so you know they are working in your favour, not against it. The same concept applies to trademarks. Registering a trademark can be a long and complex process, so having legal help is essential to ensure everything goes smoothly.
Legal considerations help safeguard your business and secure its future by protecting your revenue streams, limiting your liabilities, and setting out methods for resolving issues. For business owners, investing in the legal side of your business always pays off.
Next Steps
Doing your due diligence and seeking expert legal help are essential when it comes to ensuring your business survives in its first years. To summarise what we’ve discussed:
Here is a summary of the article in seven dot points or less:
- One in three Australian small businesses fail in their first year, often due to poor cash flow management, flawed business models, inadequate risk management, and legal issues
- Effective cash flow management is crucial as issues like late payments and unforeseen expenses can lead to business shutdown
- A flexible and well-researched business model, regularly reviewed and adjusted, is essential for business survival and success
- Identifying and mitigating operational, financial, market, compliance, and strategic risks through a robust risk management plan is vital
- Legal mistakes, such as not having tailored customer agreements or failing to protect intellectual property, can jeopardise a business
- Shareholder agreements help manage internal disputes and maintain smooth business relationships
- Consulting with a legal expert can prevent common legal mistakes, protect revenue streams, and secure the future of the business
If you would like a consultation on your small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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