Business Plan Risk Analysis
A Business Plan Risk Analysis considers critical factors that may lead to a failure of the business concept. Such factors can involve failures during the implementation phase, as well as during operations.
Such potential factors are ordered according to the probability at which they can arise.
1. Insufficient demand:
This is the most frequent reason that leads to business failure. This includes permanently low demand, as well as a temporary collapse in demand. Often demand estimates were too optimistic at the outset.
Such failures might also come from external shocks instead of operating deficiencies. 19% of businesses with insufficient demand go bankrupt.
50% of these businesses report that, once demand slacked, they did not react accordingly, because they believed that this phenomenon was only temporary.
Since the expected frequency of customers during the start-up phase is still low, a critical success factor is to focus promotional effort so as to generate customer loyalty early on, which will help minimize the effects of demand fluctuations.
This is also important for the future development of the business.
2. Behavior of Competition:
Due to low entry barriers, additional businesses can enter the market at low cost. Approximately 16% of insolvent businesses were driven out of the market by that competition.
A better service concept, innovative ideas and concentration on core businesses are easy means for an entrant to gain a competitive edge.
Many business are run on a small equity base. The majority of investments are funded by debt. If the business becomes unprofitable, debt obligations cannot be covered.
Little over 10% of insolvent firms reported over-indebtedness as the reason for going bankrupt. It is therefore important that a share of earnings is retained for debt service.
4. Macroeconomic Conditions:
In a cyclical downturn, revenue expectations may not come in according to expectation. Although this factor does not affect the business in itself, it does have an impact on profitability, liquidity and leverage.
Costs remain constant during such periods, but revenues typically decrease which affects overall profitability.
5. Location and market:
The market of the business and the selection of the right potential customers is an important success factor and one of the fundamental decisions that has an impact on the future prosperity of the firm. Therefore, a careful analysis is necessary.
Often start-ups did not consider that, even when the choice of market may not be wrong at the outset, it may later become so when economic conditions change.
6. Wrong Business Decisions:
Often wrong business decisions and difficult situations go unnoticed for some period, which can lead to a failure of the business.
Critical and independent reflection of a decision are critical factors to determine the value of a management decision and evaluate the business’ profitability.
A critical management instrument is the ability to detect potential failures and problems. Certain key figures can help measure this ability and objectively determine a decision’s chance for success. Small businesses should use such indicator ratios to assess their business outlooks.
Check out this infographic on the 5 Main Reasons Why Startups Fail to get another view.