Assessing start-ups

Business objective

Definition: A medium to long-term, specific, quantifiable target that provides the business with a sense of direction.


Objectives of business start-ups

  1. Profit maximisation / profit satisficing / break-even
  2. Survival – liquidity
  3. Sales growth
  4. Social objectives, e.g: to be environmentally friendly

Task

List some other start-up objectives.

Benefits of setting objectives

  • Provide clear sense of direction, and sense of achievement if targets are reached, and as a result, targets motivate
  • Clear targets allow firms to to take action to meet these targets
  • Allow the performance of the business to be measured against these targets
  • Make the aims of the business clear to lenders and investors, which should make it easier to raise finance.

To assess a business to see if it is likely to be successful, consider:

  • Does the idea fit with the firm’s business objectives?
  • Customer needs and wants,
  • Product and whether it can be produced and supplied profitably,
  • Possible competition and pricing strategy,
  • Risks,
  • Any USPs that differentiate the product and add value.

The risks of business start-ups

Here are some risks of business start-ups and ways in which these risks can be reduced.

Why new businesses fail

1. Insufficient capital (finance invested)

  • The amount of finance needed to start and keep the business going can be under-estimated
  • Also, the income from sales may be over-estimated.As a result, of the above:
    • Liquidity problems – there isn’t enough cash to pay short-term bills so the firm is liquidated.

2. Poor management skills

Managers may lack the financial or staff-management skills to make the business successful.

3. Poor location

A poor location for businesses dealing directly with, or selling to the public, can be a hindrance for businesses that need to benefit from passing trade.

4. Lack of planning

Planning ahead makes the business think about what they need to do to be successful and take action in order to achieve this.

In addition, they are more likely to carry out market research before the plan ahead.  As a result, it is more likely that they will be successful.

5. Over-expansion

When a business expands too quickly by buying too many fixed assets, they may be left without enough cash to pay for their short-term bills.  Therefore, they will have cash flow problems.

6. External factors

  • Unexpected changes in demand
  • Unexpected changes in costs
  • Delays in the unavailability of supplies
  • Unexpected competition

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