Essay Sample on Startup Businesses: Navigating Financial Challenges

Introduction

It is common knowledge that more than half of the startup businesses do not make it to their first year and ninety per cent of the ones that make it will not make it to the fifth year. One of the main reasons for this is the increase in operating costs past what the entrepreneurs estimated when starting the business. The rise in prices is mainly because of the growth strategy that a business employs in its quest to increase its business activities and command a more significant portion of the market. In this paper, I will discuss the different reasons why the costs of running a business increase and what entrepreneurs can do to ensure that this does not happen.

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Growth Strategy

Every startup business aims to establish itself as one of the big companies in the market that it is in. To do so effectively, it is vital that the business has a strategy for growth. The method that a business uses to implement its growth strategy is dependent on a lot of factors, including the financial position of the business, the competition, and the intervention of the government. One of the primary growth strategies that companies use is market penetration strategy. In this strategy, the business aims to increase its market share in the same market that it has been operating in. The primary way to do this is to reduce the prices of the products of the goods and services by the business. Another growth strategy is a market expansion strategy. Here, a company tries to sell its products and services in an entirely new market. One of the reasons that might result in a business opting to this strategy is when there is too much competition in the current market (Boehm & Papaccio, 1988). Another growth strategy is the product expansion strategy. When businesses try to improve or increase the quality and amount of product that they sell without changing the market, then they employ this strategy of growth. A business can also acquire other companies as a growth strategy. A business can decide that the only way to grow is to buy another business that might have a better product portfolio or a better marketing strategy. This will give the company the edge over its competitors.

Challenges

To ensure that these growth strategies are implemented effectively, there are several hurdles that the business has to overcome. In the market penetration strategy, the business relies on reducing its price so that it can increase its sales and have a larger market share. This is risky for a startup, especially in the web development industry. Reducing the prices will reduce the amount of revenue that the business gets. Since one of the challenges startups face is the lack of funds, decreasing costs of the web development services might result in the failure of the business. The second growth strategy is to expand the current market (Amit, Muller & Cockburn, 1995). The demand for web development is extensive, and a business has to concentrate on one segment of the market before proceeding to the next. Moving to a new market before effectively mastering the current market will result in the business having to spend a lot of money in advertising in a new market segment instead of focusing its efforts in the market segment that they understand. A challenge in the product expansion strategy is the expertise and funding that is needed in the creation of a new product line (Barringer & Ireland, 2016). For a business to come up with new and better products, there are a lot of tests and research that go into the creation process. All these steps of product creation require a lot of money that startups like mine lack. Trying to create new products to sell in the available markets might stretch the finances of the startup and take away funding from vital areas like marketing and thus result in the failure of the business.

Potential Cost Overrun Sources

When the startup is growing, there is a possibility that the business will spend more than the estimated amount of money. Many sources might cause this. The main one is the unplanned costs. When businesses make financial plans, they try to make their plans as close to reality as possible. However, the programs cannot plan for every detail of the finances of the business. There are unplanned costs that will crop up during the course of the growth of the business for example, having to buy a new computer in case one was destroyed during a power surge, fixing the company car in case it gets a puncture and paying for the treatment of an employee that gets injured on the job. These unforeseen costs will result in the ballooning of the costs of running the business.

Another cause of the increase in the costs of running the business is if the entrepreneurs underestimated the complexity of the project (Pe'er & Keil, 2013). In the case of my web development startup, I might have overstated the workforce and the equipment that is needed to make websites that clients would be proud of effectively. This will force me to have to spend more than the amount of money that was budgeted to reach the same goals. The result is an increase in the amount of money that will have to be used to run the business. Another potential pitfall for business cost overrun is project delays. When the entrepreneurs make estimates and plans on the way that finances in the business will be spent, they are doing so in a specific timeframe. In case there is a delay and the business does not accomplish its plans in the time stipulated, there is bound to be an increase in costs for example, in my web development startup, I had made a plan that I would spend a certain amount of money to market my services. If I delay doing so in the timeframe, another competitor might enter the same market, and I will have to spend more to get the expected results.

Strategies to Control Cost Overruns

The first step to ensure that there is no ballooning of the cost of running the business is to identify the significant costs that the business will have in the course of its growth. To do this, the business has to conduct in-depth research in the market that it is going to operate in. This research should be conducted by experts to provide the business with a clear image of where they stand in terms of the finances needed for the business. Although the research will cost the business more in terms; finding the possible pitfalls is essential for the success of the business. Through conducting proper research, the business can estimate the amount of money that will be used and the duration that it would take for the business to achieve some milestones.

Another strategy that will ensure that the business does not suffer from an unexpected increase in costs is to ensure proper communication between the management and the employees. Effective communication is one of the main building blocks to the success of any business. Majority of the unexpected costs come to from the management, not knowing that some additional materials or services are needed in the production process. The management should ensure that they communicate with the employees to ascertain the needs of the production process and factor the requirements to the estimated costs of conducting businesses. Furthermore, the effective communication between the employees and the management will ensure that any new event in the business that needs funding is effectively relayed to the administration to be factored into the estimates. This will ensure that the estimated costs are kept in check. Effective communication channels will also ensure that the instructions from the management are quickly conveyed to the workers. These instructions can help avert problems in the business and thus save on costs. Furthermore, businesses that lack effective communication channels often have a lot of employees to cater to the lack of proper communication. By ensuring that there is effective communication in the business, the entrepreneurs help save a lot of money.

Seeking the advice of businesses in the same market is also another way that businesses can reduce the cost overruns as the business grows (Popov & Roosenboom, 2013). Established businesses have an idea of the hidden costs that the new entrepreneurs might not know about. This will give the business a better idea of the market and the estimated costs. Controlling excessive expenses is also another way that the business can keep its costs in check. Many of the startup businesses have ballooning costs because they fail to keep non-essential expenditures in check. For example, holding expensive business lunches in high-end hotels will increase the running costs of the business severally.

It is clear that an increase in the estimated cost of running a business is a real problem for both startup businesses and established businesses. Maintaining these expenses can mean the difference between a business prospering and a business failing. Entrepreneurs should conduct proper research to ensure that they have a good idea of the costs of operation that specific market demand. The entrepreneurs that are seeking to start the new business should also contact existing businesses to inquire about the potential pitfalls that the new business might not be aware of. Seeking information from rival businesses should be regulated as the other business can purposefully give the entrepreneur false information to reduce the number of competitors that it will have in its market. One sure way of ensuring that the entrepreneurs have all the information that they need is to consult the government. By doing this, the business will have the information about the amount of money that it will spend during its early days in business. A business that can keep these costs at a minimum can have more money left to put in other ventures that will give the business a competitive edge.

References

Amit, R., Muller, E., & Cockburn, I. (1995). Opportunity costs and entrepreneurial activity. Journal of Business Venturing, 10(2), 95-106. https://doi.org/10.1016/0883-9026(94)00017-O

Barringer, B. R., & Ireland, R. D. (2016). Entrepreneurship: Successfully launching new ventures (5th ed.). Don Mills, Canada: Pearson Canada Inc.

Boehm, B. W., & Papaccio, P. N. (1988). Understanding and Controlling Software Costs. IEEE Transactions on Software Engineering, 14(10), 1462-1477. https://doi.org/10.1109/32.6191

Pe'er, A., & Keil, T. (2013). Are all startups affected similarly by clusters? Agglomeration, competition, firm heterogeneity, and survival. Journal of Business Venturing, 28(3), 354-372. https://doi.org/10.1016/j.jbusvent.2012.03.004

Popov, A., & Roosenboom, P., (2013). Venture capital and new business creation. Journal of Banking and Finance, 37(12), 4695-4710. https://doi.org/10.1016/j.jbankfin.2013.08.010